Centralized Partnership Audit Regime, 6468-6573 [2018-28140]
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Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9844]
concerning the regulations relating to
section 1446, Ronald M. Gootzeit of the
Office of Associate Chief Counsel
(International), (202) 317–4953 (not tollfree numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains final
Centralized Partnership Audit Regime
regulations under sections 6221 through
6241 of the Internal Revenue Code
AGENCY: Internal Revenue Service (IRS),
(Code) to amend the Procedure and
Treasury.
Administration Regulations (26 CFR
ACTION: Final regulation.
part 301) to implement the centralized
partnership audit regime enacted by
SUMMARY: This document contains final
section 1101 of the Bipartisan Budget
regulations implementing the
Act of 2015, Public Law 114–74 (BBA),
centralized partnership audit regime.
as amended by the Protecting
These final regulations affect
partnerships for taxable years beginning Americans from Tax Hikes Act of 2015,
Public Law 114–113, div Q (PATH Act),
after December 31, 2017 and ending
and sections 201 through 207 of the Tax
after August 12, 2018, as well as
Technical Corrections Act of 2018,
partnerships that make the election to
contained in Title II of Division U of the
apply the centralized partnership audit
Consolidated Appropriations Act of
regime to partnership taxable years
beginning on or after November 2, 2015, 2018, Public Law 115–141 (TTCA).
Section 1101(a) of the BBA removed
and before January 1, 2018.
former subchapter C of chapter 63 of the
DATES:
Code effective for partnership taxable
Effective date: These regulations are
years beginning after December 31,
effective on February 27, 2019.
2017. Former subchapter C of chapter 63
Applicability Date: For dates of
of the Code contained the unified
applicability, see §§ 301.6221(a)–1(c);
partnership audit and litigation rules
301.6222–1(e); 301.6225–1(i); 301.6225–
enacted by the Tax Equity and Fiscal
2(g); 301.6225–3(e); 301.6226–1(g);
Responsibility Act of 1982, Public Law
301.6226–2(h); 301.6226–3(i); 301.6227–
97–248 (TEFRA) that were commonly
1(h); 301.6227–2(e); 301.6227–3(d);
referred to as the TEFRA partnership
301.6231–1(h); 301.6232–1(f);
procedures or simply TEFRA. Section
301.6233(a)–1(d); 301.6233(b)–1(e);
1101(b) of the BBA also removed
301.6234–1(f); 301.6235–1(f); 301.6241–
subchapter D of chapter 63 of the Code
1(b); 301.6241–2(b); 301.6241–3(g);
and part IV of subchapter K of chapter
301.6241–4(b); 301.6241–5(d);
1 of the Code, rules applicable to
301.6241–6(c).
electing large partnerships, effective for
FOR FURTHER INFORMATION CONTACT:
partnership taxable years beginning
Concerning the regulations under
after December 31, 2017. Section
sections 6221, 6226, 6235, and 6241,
1101(c) of the BBA replaced the TEFRA
Jennifer M. Black of the Office of
partnership procedures and the rules
Associate Chief Counsel (Procedure and applicable to electing large partnerships
Administration), (202) 317–6834;
with a centralized partnership audit
concerning the regulations under
regime that determines adjustments and,
sections 6225, 6231, and 6234, Joy E.
in general, determines, assesses, and
Gerdy-Zogby of the Office of Associate
collects tax at the partnership level.
Chief Counsel (Procedure and
Section 1101(g) of the BBA set forth the
Administration), (202) 317–6834;
effective dates for these statutory
concerning the regulations under
amendments, which are effective
sections 6222, 6227, 6232, and 6233,
generally for returns filed for
Steven L. Karon of the Office of
partnership taxable years beginning
Associate Chief Counsel (Procedure and after December 31, 2017.
Administration), (202) 217–6834;
On December 18, 2015, section 1101
concerning the regulations under
of the BBA was amended by the PATH
section 6225 relating to creditable
Act. The amendments under the PATH
foreign tax expenditures, Larry R.
Act are effective as if included in
Pounders, Jr. of the Office of Associate
section 1101 of the BBA, and therefore,
Chief Counsel (International), (202)
subject to the effective dates in section
317–5465; concerning the regulations
1101(g) of the BBA.
relating to chapters 3 and 4 of the
On June 14, 2017, the Department of
Internal Revenue Code (other than
the Treasury (Treasury Department) and
section 1446), Subin Seth of the Office
the IRS published in the Federal
of Associate Chief Counsel
Register (82 FR 27334) a notice of
(International), (202) 317–5003; and
proposed rulemaking (REG–136118–15)
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(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 alternative to payment of the
imputed underpayment by the
partnership, 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
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 60144) 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
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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 January 1, 2018. Corresponding
temporary regulations under
§ 301.9100–22T were also withdrawn.
On August 17, 2018, the Treasury
Department and the IRS published in
the Federal Register (83 FR 41954) a
notice of proposed rulemaking, notice of
public hearing, and withdrawal and
partial withdrawal of notices of
proposed rulemaking (REG–136118–15)
(August 2018 NPRM) that withdrew the
regulations proposed in the June 2017
NPRM, the November 2017 NPRM, the
December 2017 NPRM, and the
February 2018 NPRM, and proposed
regulations reflecting the technical
corrections enacted in the TTCA as well
as other changes as discussed in the
preamble to the August 2018 NPRM.
Written public comments were received
in response to the August 2018 NPRM,
and a public hearing regarding the
proposed regulations was held on
October 9, 2018.
In the preambles to the June 2017
NPRM and November 2017 NPRM,
comments were requested regarding
certain international and tax-exempt
aspects of the centralized partnership
audit regime. No comments were
received in response to these requests,
other than a comment regarding
fiduciary issues under title I of the
Employee Retirement Income Security
Act of 1974 (ERISA), which is discussed
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later in section 3.B.i of the Summary of
Comments and Explanation of
Revisions. The Treasury Department
and IRS will still consider comments on
whether any issues related to
international rules and tax-exempt
partners warrant guidance either under
the centralized partnership audit regime
provisions or under the relevant
provisions of the Code directly related
to those areas.
After careful consideration of all
written public comments received in
response to the June 2017 NPRM, the
December 2017 NPRM, and the August
2018 NPRM, as well as statements made
during the public hearings for the June
2017 NPRM and the August 2018
NPRM, the portions of the August 2018
NPRM described in this preamble are
adopted as amended by this Treasury
Decision. Comments received in
response to the February 2018 NPRM or
that otherwise concern basis and tax
attribute rules under § 301.6225–4 or
§ 301.6226–4 will be addressed in future
guidance. For purposes of this
preamble, the regulations proposed in
the June 2017 NPRM, the November
2017 NPRM, and the December 2017
NPRM are collectively referred to as the
‘‘former proposed regulations.’’ The
regulations proposed in the August 2018
NPRM are referred to as the ‘‘proposed
regulations.’’
Summary of Comments and
Explanation of Revisions
Thirty written comments were
received in response to the June 2017
NPRM. Five statements were provided
at the public hearing held on September
18, 2017. Four written comments were
received in response to the December
2017 NPRM. No public hearing was
held. Eight written comments were
received in response to the August 2018
NPRM, and one statement was provided
at the public hearing held on October 9,
2018. All of these comments (both
written and provided orally at the
public hearings) have been considered,
and revisions to the regulations were
made in response to the comments. The
written comments received are available
for public inspection at
www.regulations.gov or upon request.
In addition to changes in response to
the comments, editorial revisions were
also made to correct typographical
errors, grammatical mistakes, and
erroneous cross-references. Revisions
were also made to clarify language in
the proposed regulations that was
potentially unclear. Unless specifically
described in this Summary of
Comments and Explanation of
Revisions, such revisions were not
intended to change the meaning of the
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language that was revised. All
applicability dates were revised to
provide that the final regulations will
not apply to taxable years that ended
before the date the August 2018 NPRM
was filed with the Federal Register. To
the extent comments recommended as a
general matter that the regulations take
into account the TTCA amendments,
those comments were adopted as
described in this Summary of
Comments and Explanation of
Revisions.
1. Scope of the Centralized Partnership
Audit Regime
Three comments were received
regarding the scope of the centralized
partnership audit regime. All of the
comments concerned former proposed
§ 301.6221(a)–1, which was issued
before the TTCA was enacted. No
comments were received on proposed
§ 301.6221(a)–1 as revised subsequent to
the TTCA in the August 2018 NPRM.
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 shall be determined at the
partnership level. Former proposed
§ 301.6221(a)–1(b)(1)(i) had 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 and any information
contained in the partnership’s books
and records for the taxable year. One
comment stated the definition under
former proposed § 301.6221(a)–1(b)(1)(i)
included items on the partnership
return or in the partnership’s books and
records regardless of whether (i) such
items or information would affect the
income that the partnership reports or
(ii) the particular tax characteristics of
the separate partners would affect the
ultimate tax liability. The comment
expressed concern that, by broadly
defining the scope of the centralized
partnership audit regime, the proposed
regulations would expand the number
of partnerships and partners that
encounter differences between the
correct tax they would have paid if they
had properly reported, and the amount
of the imputed underpayment. No
changes to the regulations were made in
response to this comment.
The TTCA amended section 6221(a)
by replacing the phrase ‘‘items of
income, gain, deduction, loss or credit
of a partnership for a partnership
taxable year (and any partner’s
distributive share thereof)’’ with the
term ‘‘partnership-related item.’’ The
TTCA added a definition of
‘‘partnership-related item’’ to section
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6241(2). The August 2018 NPRM
adopted the TTCA amendments to
section 6221(a) and 6241 by moving the
majority of the regulation text under
former proposed § 301.6221(a)–1 to the
definition of ‘‘partnership-related item’’
under proposed § 301.6241–6. Because
of these changes, the comment is
generally no longer applicable to this
section of the regulations.
In addition, the TTCA amendments
address the comment’s first concern that
the scope of former proposed
§ 301.6221(a)–1(b)(1)(i) was overly
broad in that it was delineated without
regard to whether items or information
adjusted at the partnership level affect
the income of the partnership. Section
6241(2)(B) broadly defines a
partnership-related item as any item or
amount with respect to the partnership
which is relevant in determining the tax
liability of any person under chapter 1
of the Code and any partner’s
distributive share thereof. Section
6241(2)(B). Nothing within that
definition limits the term partnershiprelated item to income reported by the
partnership. To the contrary,
partnership-related items are any items
with respect to the partnership that are
relevant to determining any person’s
chapter 1 tax, which could include
partnership expenses, credits generated
by partnership activity, assets and
liabilities of the partnership, and any
other items concerning the partnership
that are relevant to someone’s chapter 1
tax, irrespective of the impact such
items have on the partnership’s income.
Furthermore, the core feature of the
centralized partnership audit regime is
to provide a centralized method of
examining items of a partnership.
Adjusting items on a partnership’s
return or in the partnership’s books and
records, regardless of their effect on
partnership income, in a centralized
partnership proceeding at the
partnership level is not only consistent
with this centralized approach, but it
also results in efficiencies because one
proceeding can be conducted that will
bind all partners and the partnership.
See section 6223(b). Nothing in the
statute requires only items that affect
the partnership’s income, as reported on
the partnership’s return, to be adjusted
at the partnership level.
Regarding the comment’s second
concern that an imputed underpayment
is determined without regard to
partners’ tax characteristics and that the
imputed underpayment amount differs
from the amount of tax the partners
would have paid had the items been
reported correctly, those concerns are
addressed in section 3.A. of this
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Summary of Comments and Explanation
of Revisions.
Former proposed § 301.6221(a)–
1(b)(1)(i) provided as an example of an
‘‘item of income, gain, loss, deduction,
or credit’’ any items related to
transactions between a partnership and
any person including disguised sales,
guaranteed payments, section 704(c)
allocations, and transactions to which
section 707 applies. Former proposed
§ 301.6221(a)–1(b)(1)(i)(H). One
comment suggested that this provision
inappropriately included partner items
such as a disguised fee under section
707(a)(2)(A) and the gain or loss a
partner may realize from a disguised
sale under section 707(a)(2)(B). The
comment recommended revising the
regulations to refer to ‘‘items of a
partnership related to . . . transactions
to which section 707 applies.’’
Similarly, another comment expressed
concern about situations where a
partner was not acting in the partner’s
capacity as a partner, but rather as a
counterparty to a transaction with the
partnership. The comment suggested
that the regulations clarify that a final
determination of a transaction between
a partnership and a partner following an
examination of the partnership is not
binding on any third person, including
a partner not acting in its capacity as a
partner and who was not a party to the
examination.
These comments are addressed by the
final regulations under § 301.6241–
1(a)(6) regarding the definition of
partnership-related item. Proposed
§ 301.6241–6(b)(4) and (5) defined the
phrase ‘‘item or amount with respect to
the partnership’’ to include an item or
amount that relates to a transaction with
the partnership by a partner acting in its
capacity as a partner or by an indirect
partner acting in its capacity as an
indirect partner as well as an item or
amount relating to a transaction that is
described in section 707(a)(2), 707(b), or
707(c). Accordingly, under the proposed
regulations if an item or amount related
to a transaction that is described in
section 707(a)(2), 707(b), or 707(c) and
was relevant in determining chapter 1
tax, that item was a partnership-related
item and must be determined at the
partnership level.
As described more fully in section
1.B., the final regulations clarify that
items or amounts relating to
transactions of the partnership are items
or amounts with respect to the
partnership only if those items or
amounts are shown, or required to be
shown, on the partnership return or are
required to be maintained in the
partnership’s books and records. The
final regulations further clarify that
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items or amounts shown, or required to
be shown, on a return of a person other
than the partnership (or in that person’s
books and records) that result after
application of the Code to a partnershiprelated item and that take into account
the facts and circumstances specific to
that person are not partnership-related
items and, therefore, are not determined
at the partnership level under the
centralized partnership audit regime.
The changes in the final regulations to
the definition of partnership-related
item address the concerns raised by the
comment. First, § 301.6241–1(a)(6)
provides that only items or amounts
reflected, or required to be reflected on
the partnership’s return or in its books
and records are with respect to the
partnership. If such items are relevant to
determining chapter 1 tax such items
are partnership-related items. This rule
applies equally to items or amounts
relating to any transaction with, liability
of, or basis in the partnership. Second,
§ 301.6241–1(a)(6) further provides that
items reflected, or required to be
reflected on the return of a person other
than the partnership or in that person’s
books and records that result after
application of the Code to a partnershiprelated item are not with respect to a
partnership and, thus, not partnershiprelated items. Accordingly, only items
of the partnership, as suggested by the
comment, are partnership-related items
under § 301.6241–1(a)(6).
Proposed § 301.6221(a)–1(a) provided
that any consideration necessary to
make a determination at the partnership
level under the centralized partnership
audit regime, including the period of
limitations on making partnership
adjustments under section 6235 or facts
necessary to calculate an imputed
underpayment under section 6225 were
determined at the partnership level. The
final regulations under § 301.6221(a)–
1(b) retain this concept, but with revised
language. The final regulations provide
that any legal or factual determinations
underlying any adjustment or
determination made under the
centralized partnership audit regime are
also determined at the partnership level
under the centralized partnership audit
regime. For instance, such
determinations include the period of
limitations on making adjustments
under the centralized partnership audit
regime and any determinations
necessary to calculate the imputed
underpayment or any modification of
the imputed underpayment under
section 6225.
After consideration, the Treasury
Department and the IRS have concluded
that the phrase ‘‘legal and factual
determinations underlying an
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adjustment or determination’’ instead of
the phrase ‘‘any consideration necessary
to make a determination at the
partnership level’’ more clearly and
accurately reflects the rule that facts and
legal conclusions that underlie
adjustments to partnership-related
items, tax, and penalties made at the
partnership level are also determined at
the partnership level. The revised
language more clearly describes the rule
and provides taxpayers with more
definitive guidance regarding the items
determined at the partnership level.
Additionally, this language is consistent
with language used in proposed
§ 301.6241–6(b)(8), which was removed
as described in section 2 of this
Summary of Comments and Explanation
of Revisions.
Lastly, the final regulations remove
the list of cross-references from the end
of proposed § 301.6221(a)–1(a). The
TTCA amended section 6221(a) to
provide that adjustments to partnershiprelated items are determined at the
partnership level ‘‘except to the extent
otherwise provided in’’ subchapter C of
chapter 63. Because the statutory
language is clear that there are
exceptions within subchapter C of
chapter 63 to the general rule under
section 6221(a) and § 301.6221(a)–1, the
list of cross-references from proposed
§ 301.6221(a)–1(a) was no longer
necessary.
A. Penalty Defenses
Five comments were received with
respect to former proposed
§ 301.6221(a)–1(c), which provided that
any defense to any penalty, addition to
tax, or additional amount must be raised
by the partnership in a partnership-level
proceeding under the centralized
partnership audit regime, regardless of
whether the defense relates to facts and
circumstances relating to a person other
than the partnership. Once the
adjustments determined in the
partnership-level proceeding became
final, no defense to any penalty
determined could be raised or taken into
account. Former proposed
§ 301.6221(a)–1(c).
Several comments stated that the rule
under former proposed § 301.6221(a)–
1(c) was inequitable to partners because,
among other reasons, partners had no
control over whether the partnership
representative would raise a partnerspecific defense, especially in the case
of indirect partners who are less directly
connected to the partnership
representative. Some comments
recommended the regulations clarify
how partner-level defenses would be
raised in the partnership-level
proceeding and how decisions regarding
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those penalty defenses would be
communicated to partners. Other
comments suggested that partners
should be able to raise their own
partner-level defenses. In response to
these comments, former proposed
§ 301.6221(a)–1(c) was removed from
the proposed regulations in the
December 2017 NPRM. See section 3 of
the preamble to the December 2017
NPRM. The December 2017 NRPM also
proposed regulations under sections
6225 and 6226 (former proposed
§§ 301.6225–2(d)(2)(viii) and 301.6226–
3(i)) which allowed partners to raise
their own partner-level defenses at the
time partners took into account the
partnership adjustments determined at
the partnership level (either through the
modification process or as part of the
election under section 6226). For further
discussion of the rules regarding
partner-level defenses under sections
6225 and 6226, see sections 3.D. and
4.C.ii.I. of this preamble. See also
section 8.A. of this preamble regarding
section 6233(a).
B. Partnership-Related Item
Proposed § 301.6241–6(a) defined the
term ‘‘partnership-related item’’ as any
item or amount with respect to the
partnership which is relevant to
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) provided that an item or amount is
with respect to the partnership without
regard to whether the item or amount
appeared on the partnership return if
the item or amount was described in
one of eight categories. Two categories
described items or amounts that are
shown or reflected, or required to be
shown or reflected, on a return of the
partnership under section 6031 or are in
the partnership’s books and records.
The other categories described items or
amounts relating to certain transactions
with the partnership, items or amounts
relating to liabilities of the partnership
provided the item or amount was
reported by a partner, and items or
amounts relating to basis in the
partnership. Imputed underpayments
and any legal or factual determinations
necessary to make an adjustment to
items or amounts described in the other
categories were also defined as items or
amounts with respect to the partnership.
Proposed § 301.6241–6(b)(1) through (8).
After careful consideration, the
Treasury Department and the IRS have
revised the definition of ‘‘item or
amount with respect to the
partnership.’’ First, the final regulations
remove the language ‘‘without regard to
whether or not such item or amount
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appears on the partnership’s return’’
from proposed § 301.6241–6(b). That
phrase derived from the parenthetical in
section 6241(2)(B)(i) that follows ‘‘item
or amount with respect to the
partnership.’’ The Treasury Department
and the IRS have determined that the
parenthetical language describes items
or amounts that appear on the
partnership return, items or amounts
that were required to appear on the
return but actually did not, and items or
amounts that factor into the
determination of items or amounts that
do appear on the partnership return.
The Treasury Department and the IRS
have concluded that this parenthetical
does not extend the concept of ‘‘with
respect to the partnership’’ to items or
amounts that are reported by third
parties and that are otherwise not
defined as partnership-related items in
these final regulations. See § 301.6241–
1(a)(6)(vi)(A) and (B).
Second, the final regulations replace
the list of eight categories of items or
amounts that were with respect to the
partnership with a single, streamlined
paragraph, § 301.6241–1(a)(6)(iii) that
includes all the items and amounts from
the prior list, except as described in this
section of this preamble. Third, the
definition of partnership-related item
was moved from proposed § 301.6241–
6 and placed under the definition of
‘‘partnership adjustment’’ in
§ 301.6241–1(a)(6) to more closely track
the statutory structure of section
6241(2).
The final regulations under
§ 301.6241–1(a)(6)(iii) maintain the rule
from the proposed regulations that items
or amounts shown or reflected, or
required to be shown or reflected, on the
return of the partnership are items or
amounts with respect to the partnership.
The final regulations also clarify that
items or amounts in the partnership’s
book or records are items or amounts
with respect to the partnership if those
items or amounts are ‘‘required to be
maintained’’ in the partnership’s books
and records. The phrase ‘‘required to be
maintained’’ is added to account for
items that may be maintained in the
partnership’s books and records on a
voluntary basis. For example, a
partnership may choose to maintain the
outside basis of each of its partners in
its books and records, even though the
Code does not require this information
be maintained by the partnership. The
rule make clears that the voluntary
recording of an item in the partnership’s
books is not determinative of the
meaning of the phrase ‘‘item or amount
with respect to the partnership.’’ A
partnership cannot convert an item or
amount that is not with respect to the
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partnership into an item or amount that
is with respect to the partnership merely
by including that item or amount in the
partnership’s books and records. This
rule provides consistency among
partnerships and more certainty
regarding what items in the books and
records of a partnership constitute items
or amounts with respect to the
partnership.
The final regulations do not retain the
separate categories of items relating to
transactions with, liabilities of, and
basis in the partnership. Instead, the
final regulations adopt a streamlined
approach and provide that those items
are only with respect to the partnership
if those items are reflected, or required
to be reflected, on the partnership’s
return or required to be maintained in
its books and records. The separate
treatment under the proposed
regulations for these types of items and
amounts was duplicative. Items or
amounts relating to transactions with,
liabilities of, and basis in the
partnership are items or amounts shown
or reflected, or would be required to be
shown or reflected, on the partnership
return or required to be maintained in
the partnership’s books and records.
Accordingly, describing separate
categories for such items was
unnecessary and potentially confusing.
Under § 301.6241–1(a)(6)(iii), an item
or amount is with respect to the
partnership only if the item or amount
is shown or reflected, or required to be
shown or reflected, on the partnership
return or required to be maintained in
the partnership’s books and records.
Consistent with that interpretation, the
final regulations provide an item or
amount relating to transactions with,
liabilities of, and basis in the
partnership is with respect to the
partnership only if the item or amount
is reported, or required to be reported,
on the partnership return or is required
to be maintained in the partnership’s
books and records.
The term partnership-related item
includes a partner’s distributive share of
items or amounts that are with respect
to the partnership which are relevant in
determining the chapter 1 tax of any
person. Section 6241(2)(B)(ii). In taking
into account the partner’s distributive
share of partnership-related items, a
partner must apply the provisions of the
Code to each partnership-related item to
compute the partner’s ultimate tax
liability. The application of the Code to
the partner’s share of partnershiprelated items requires taking into
account facts and circumstances that are
unique to a particular partner. Generally
speaking, those facts and circumstances
are known only by the partner, are not
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known by the partnership, and are
based on information only within the
partner’s control and outside of the
partnership’s control.
In an examination of items on a
partner’s return, the IRS generally needs
information pertaining to the partner’s
specific facts and circumstances to
determine the correctness of the items.
The partner whose items are at issue is
normally the best source for that type of
information. While a partnership may
possess some information about a
particular partner’s facts and
circumstances, obtaining information
from the partnership is generally not as
efficient as obtaining information from
the partner. Obtaining such information
from the partner also preserves the
privacy interests of the partner.
Therefore, from both a taxpayer and tax
administration standpoint, an
examination of items for which
application of the Code depends on a
partner’s particular facts and
circumstances is, in general, best
performed at the partner level, rather
than the partnership level.
Under the TEFRA procedures, these
types of items were considered affected
items and adjustments to those items
were computational adjustments. 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. 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). One way to achieve a
sufficiently broad scope is to attempt to
define the term ‘‘partnership-related
item’’ to include those items that would
have been partnership items, affected
items, and computational adjustments
under TEFRA. For the following
reasons, however, this approach was not
adopted.
The centralized partnership audit
regime is a fundamentally distinct
system from TEFRA. While under both
sets of rules adjustments are made at the
partnership level and those adjustments
are binding on partners, the framework
for assessing and collecting tax resulting
from those adjustments is significantly
different. Under TEFRA, tax attributable
to partnership items determined at the
partnership level and tax attributable to
affected items was assessed against the
partners of the partnership through
computational adjustments made by the
IRS with respect to the partner.
Computational adjustments were made
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either by mailing a notice of deficiency
to the partner if factual determinations
were necessary at the partner level or by
directly assessing tax against the
partner. The tax was assessed with
respect to the year that was audited by
the IRS, and assessments were required
to be made within one year of the
completion of the partnership-level
proceeding.
Under the centralized partnership
audit regime, adjustments to
partnership-related items are similarly
determined at the partnership level. In
stark contrast to the TEFRA procedures,
however, the tax attributable to those
adjustments is also assessed and
collected at the partnership level in the
form of an imputed underpayment
determined pursuant to section 6225.
An imputed underpayment is assessed
as if it were a tax imposed for the
adjustment year, generally the year in
which the adjustments are finally
determined, instead of the year that was
subject to examination. Section 6225(d).
The partnership, not the partners, is
liable for the imputed underpayment. A
partnership may elect the alternative to
payment of the imputed underpayment
under section 6226 and ‘‘push out’’ the
adjustments determined at the
partnership level, in which case the tax
attributable to the adjustments is
assessed and collected from the
partnership’s partners. Unlike the
TEFRA procedures, however, under the
push out process, assessment and
collection is initiated by the partner,
rather than by the IRS, by the partner
taking into account the partnership
adjustments and self-reporting any tax
due on the partner’s next filed return,
alleviating both the administrative and
timing issues that arose in TEFRA. See
section 2.A of the preamble to the June
2017 NPRM.
When calculating an imputed
underpayment based on adjustments
determined at the partnership level,
taxpayer favorable adjustments are
generally disregarded and the highest
rate of tax is applied. This formula may
produce an amount that is larger than
the cumulative amount of tax the
partners would have paid had the
partners taken the adjustments into
account separately, but it also relieves
the IRS of the obligation to account for
specific partner facts and circumstances
when initially determining the imputed
underpayment amount. During the
modification phase, a partnership may,
at its option, request that the imputed
underpayment be modified to take into
account partner tax attributes and facts
and circumstances. See section 3.B. for
further discussion.
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When taking into account adjustments
under section 6226, a partner
determines the increase or decrease in
tax that would have occurred if the
adjustments were taken into account for
the partner’s tax year correlating to the
year that was audited. For intervening
years, any year between the audited year
and the current year, the partner must
determine the effect on tax attributes of
the adjustments and the resulting
increase or decrease that would have
occurred for those years as well. The
partner then adjusts her tax for the
current year by the aggregate tax that
would have resulted had the
adjustments been properly taken into
account. Under TEFRA, it was the IRS’s
burden to determine tax at the partner
level. The centralized partnership audit
regime, under section 6226, shifts that
burden from the IRS to the partner. As
a result, it is neither necessary nor
efficient for the IRS to determine at the
partnership level the facts and
circumstances specific to a partner in
order for that partner to determine the
proper amount of tax in the case of a
push out.
The rules for calculating an imputed
underpayment under section 6225 and
the computation rules under section
6226 are sufficiently broad to ensure
that the tax attributable to items that
would have been partnership items,
affected items, and computational
adjustments under the TEFRA is
collected under the centralized
partnership audit regime. When the
partnership pays an imputed
underpayment, the application of
limitations and restrictions is assumed
and favorable adjustments are
disregarded unless a partnership
demonstrates that partner tax attributes
should override those assumptions. In
this way, the imputed underpayment
determination, including any
modifications, sufficiently accounts for
those types of items that would have
been affected items or computational
adjustments under TEFRA. Similarly, in
the case of an election under section
6226, the re-computation process
necessarily involves the application of
items that would have been affected
items or computational adjustments.
Because both the imputed
underpayment rules and the section
6226 rules sufficiently address items
that would have been partnership items,
affected items, and computational
adjustments, it is both unnecessary and
over-inclusive to define partnershiprelated item to encompass all of those
items. Accordingly, the final regulations
clarify that the term partnership-related
item does not include items or amounts
that would have been TEFRA affected
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items or computational adjustments.
The final regulations do this by defining
‘‘with respect to the partnership’’ to
exclude items or amounts shown, or
required to be shown, on a return of a
person other than the partnership (or in
that person’s books and records) that
result after application of the Code to a
partnership-related item and that take
into account the facts and circumstances
specific to that person. Because these
items and amounts are not with respect
to the partnership, they are not
partnership-related items the IRS must
adjust at the partnership level. Two
examples were added to the final
regulations under § 301.6241–1(a)(6)(vi)
to illustrate this rule.
The definition of ‘‘with respect to the
partnership,’’ and by extension
partnership-related item, under the final
regulations preserves the centralized
nature of the proceeding with respect to
the partnership. During the partnership
level proceeding under the centralized
partnership audit regime, the IRS
adjusts items that are germane to the
partnership as an entity—that is, items
reported by the partnership on its return
or items in its books and records
generally used for purposes of
completing the return. The partnership
has access to this information, and it is
therefore, in general, most efficient to
obtain this information from the
partnership in the partnership level
proceeding.
This rule also protects the tax and
privacy interest of partners. Under
section 6223, partners are bound by
actions taken by the partnership in the
partnership proceeding and by any final
decision in the partnership proceeding.
Unlike under TEFRA, individual
partners do not have a right to
participate in the partnership level
administrative or judicial proceeding. If
items based on the application of the
Code to a particular partner based on
that partner’s facts and circumstances
were items required to be determined at
the partnership level, the partner may
be unable to dispute adjustments to
those items. And even if the partner
were able to dispute adjustments to
those items, the partner would need to
divulge private information in a
proceeding in which the partnership
was the party, not the partner itself.
In addition, a rule that would require
that such items and amounts be
determined at the partnership level
raises significant administrative
concerns for the IRS. In general, the
partnership would in most cases lack
the facts necessary to determine items or
amounts that depend on the facts and
circumstances of the partners. By
necessity, the IRS would be required to
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6473
involve the partners in the examination
to the extent the partner’s items and
amounts were at issue. Requiring the
IRS to involve potentially the many
partners in the entity level examination
of the partnership would undermine the
efficiencies of the centralized
partnership audit regime’s concept of
the partnership representative and the
binding nature of the partnership
representative on the outcome of the
entity level examination. Further, if the
IRS did not examine all of the various
items or amounts on the partners’
returns during the partnership level
proceeding, the IRS would, for each of
the partners’ items and amount that
were also partnership-related items, be
precluded from adjusting those items at
the partner level outside of the
centralized partnership audit regime.
This would lead to an unnecessary
expansion of partnership-level
proceedings to encompass what could
more simply and efficiently be resolved
at the partner level for one or a small
group of partners.
i. Comments Concerning PartnershipRelated Item
One comment recommended that all
partners should be audited as a group,
but only about their financial
involvement within the scope of the
partnership. According to the comment,
outside interests and income should not
be determined at the partnership level.
Although it is not entirely clear what
the comment includes in the phrases
‘‘financial involvement within the scope
of the partnership’’ and ‘‘outside
interests and income’’, the Treasury
Department and the IRS understand this
comment to be a request to limit the
scope of the items that are ‘‘with respect
to the partnership’’ for purposes of this
section. Another comment suggested
that the scope of the term ‘‘partnershiprelated item’’ should not be
unreasonably broad, particularly with
respect to partner-level items where the
underlying issue is primarily of interest
to the partner and not the partnership.
The comment expressed concern that
the partnership could have little interest
in disputing a proposed adjustment that
would have little impact to the
partnership but could have a dramatic
effect on a particular partner.
These comments were adopted as
reflected in the changes to the definition
of ‘‘with respect to the partnership’’
described in this section of this
preamble. Under the final regulations,
outside interests and income and
partner-level items are not ‘‘with respect
to the partnership’’ to the extent those
are not items or amounts reflected, or
required to be reflected, on the
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partnership return or required to be
maintained in the partnership’s books
and records. In addition, the items or
amounts that are ‘‘with respect to the
partnership’’ as defined in § 301.6241–
1(a)(6)(iii) are generally items
concerning the partners’ financial
involvement within the scope of the
partnership. Accordingly, adjustments
to items concerning the partners’
financial involvement within the scope
of the partnership would generally be
determined at the partnership level, and
adjustments to items involving outside
interests and income or partner-level
items that result after application of the
Code to a partnership-related item and
that take into account facts and
circumstances specific to the partner, to
the extent provided for in this section,
are not determined at the partnership
level under the centralized partnership
audit regime.
In addition to the revisions described
earlier in this section of this preamble,
the term imputed underpayment was
moved from the definition of ‘‘item or
amount is with respect to the
partnership’’ to the definition of
partnership-related item under
§ 301.6241–1(a)(6)(ii). This change
clarifies that an imputed underpayment
is always a partnership-related item.
First, an imputed underpayment is a
creation of the centralized partnership
audit regime and can only arise under
the centralized partnership audit
regime. See sections 6225, 6226, and
6227. Second, the statute expressly
defines an imputed underpayment as an
item or amount that is with respect to
the partnership. Section 6241(2)(B)(i).
Third, an imputed underpayment is
relevant in determining the liability of
any person under chapter 1, as defined
in § 301.6241–1(a)(6)(iv), because
payment of the imputed underpayment
by the partnership relieves the partners
of any chapter 1 liability attributable to
the reviewed year partnership
adjustments.
2. Partner’s Return Must Be Consistent
With Partnership Return
Five comments were received
concerning section 6222, regarding the
requirement that a partner’s return be
consistent with the partnership return.
The comments covered the following
topics: Inconsistent treatment in the
case of an amended return, an
administrative adjustment request, or
where no partnership return is filed; the
form and method for identifying
inconsistent treatment; proceedings to
adjust identified, inconsistently
reported items; and the election
regarding consistent treatment with a
schedule furnished to the partner by the
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partnership. In addition to responding
to these comments, this section of the
preamble describes changes to the
language of § 301.6222–1(a)(2) regarding
partners that are partnerships with an
election in effect under section 6221(b).
A. Inconsistent Treatment on an
Amended Return and Definition of
Partner’s Return for Purposes of
§ 301.6222–1
One comment recommended that the
regulations clarify that a partner may
file an amended return in order to take
a position inconsistent with the filed
partnership return as long as such
amended return includes a statement
identifying the inconsistent treatment.
Under section 6222(a), a partner shall,
on the partner’s return, treat each
partnership-related item in a manner
that is consistent with the treatment of
such item on the partnership return.
Proposed § 301.6222–1(a) provided that
the treatment of partnership-related
items 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. The
term ‘‘partner’s return’’ is not defined in
either section 6222(a) or proposed
§ 301.6222–1(a).
Section 6222(a) and § 301.6222–1(a)
are designed to ensure consistent
treatment of partnership-related items
on partners’ returns and the partnership
return filed with the IRS, except for
cases where the partner notifies the IRS
of the inconsistency. The requirement to
be consistent with the partnership
return extends to each return filed by
the partner that reflects, or is required
to reflect, partnership-related items.
This includes both original and
amended returns. Any other application
of this requirement would render the
requirement of consistency meaningless.
For example, a partner could file a
return on April 15 taking a consistent
position, only to turn around on April
16 and file an amended return taking an
inconsistent position.
To clarify that the consistency
requirement under section 6222(a) and
proposed § 301.6222–1(a) applies to
each return of the partner, the final
regulations provide that the term
‘‘partner’s return’’ for purposes of
§ 301.6222–1 includes any return,
statement, schedule, or list, and any
amendment or supplement thereto, filed
by the partner with respect to any tax
imposed by the Internal Revenue Code.
Accordingly, pursuant to § 301.6222–
1(a), a partner on either an original or
an amended return must treat
partnership-related items consistently
with how those items were treated on
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the partnership return filed with the
IRS.
The clarification of the term
‘‘partner’s return’’ also addresses the
comment’s suggestion that the
regulations permit inconsistent
treatment on an amended return
provided the IRS is notified of that
inconsistent treatment. Under
§ 301.6222–1(c)(1), the requirement that
a partner treat a partnership-related item
consistently with the partnership’s
treatment of that item, and the effect of
inconsistent treatment, do not apply to
partnership-related items identified as
inconsistent (or that may be
inconsistent) in a statement attached to
the partner’s return on which the
partnership-related item is treated
inconsistently. As clarified in these final
regulations, the term partner’s return for
purposes of § 301.6222–1 includes any
amendment to the partner’s original
return. Accordingly, so long as a partner
notifies the IRS of an inconsistent
treatment, in the form and manner
prescribed by the IRS, by attaching a
statement to the partner’s return—
including an amended return—on
which the partnership-related item is
treated inconsistently, the consistency
requirement under § 301.6222–1(a), and
the effect of inconsistent treatment
under § 301.6222–1(b), do not apply to
that partnership-related item.
i. Limitations on Filing Amended
Returns Reporting Inconsistent
Positions
When a partner on an amended return
treats a partnership-related item
inconsistently with how the item was
treated on the partnership return, the
partner is making a request for an
administrative adjustment of that
partnership-related item. Accordingly,
the rule under proposed § 301.6227–1(a)
that provided a partner may not request
an administrative adjustment of a
partnership-related item was revised to
account for situations in which on an
amended return a partner treats a
partnership-related item inconsistently
with the partnership return pursuant to
§ 301.6222–1(c)(1).
Section 6227(c) provides that in no
event may a partnership file an AAR
after a notice of an administrative
proceeding with respect to the taxable
year is mailed under section 6231.
Consistent with section 6227(c),
proposed § 301.6227–1(b) provided that
no AAR may be filed after a NAP has
been mailed by the IRS, except as
provided in § 301.6231–1(f) (regarding
withdrawal of a NAP). To give effect to
this rule in the context of inconsistent
treatment, the final regulations under
§ 301.6222–1(c)(5) provide that a partner
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may not notify the IRS that the partner
is treating an item inconsistently with
the partnership return for a taxable year
after a NAP with respect to such
partnership taxable year has been
mailed by the IRS under section 6231.
This rule clarifies that once the IRS
initiates an administrative proceeding
with respect to a partnership taxable
year, any adjustment to a partnershiprelated item for that year must be
determined exclusively within that
partnership-level proceeding in
accordance with section 6221(a).
Neither the partnership, through filing
an AAR, nor a partner, by taking an
inconsistent position, may adjust a
partnership-related item outside of that
proceeding. Any actions taken by the
partnership and any final decision in
the proceeding are binding on the
partnership and all its partners. Section
6223(b).
B. Inconsistent Treatment in the Case of
an Administrative Adjustment Request
Proposed § 301.6222–1(c)(2) provided
that the notification procedures under
§ 301.6222–1(c) do not apply to a
partnership-related item the treatment
of which is binding on the partner
because of actions taken by the
partnership, or because of any final
decision in a proceeding with respect to
the partnership, under the centralized
partnership audit regime. Accordingly,
under proposed § 301.6222–1(c)(2), the
provisions of § 301.6222–1(c) did not
apply with respect to the partner’s
treatment of a partnership-related item
reflected on an AAR. This meant that a
partner could not treat an item
inconsistently with how such item was
treated on an AAR. One comment
recommended that the regulations
under § 301.6222–1(c)(2) be revised to
permit a partner to notify the IRS of an
inconsistent position taken with respect
to an item reported on an AAR. This
comment was adopted.
Under section 6223(b), all partners are
bound by actions taken by the
partnership and by any final decision
with respect to the partnership under
the centralized partnership audit
regime. In the case of an AAR, section
6223(b) binds each partner to the
partnership’s making of the request
itself and the mechanism by which the
adjustments requested are taken into
account, including any election by the
partnership to have the partners take
into account the adjustments.
Accordingly, if the partnership takes
into account the adjustments by paying
an imputed underpayment, the partners
must follow the rules under section
6225. If there is no imputed
underpayment or if the partnership
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elects to have the partners take into
account the adjustments, the partners
must follow the procedures under
§ 301.6227–3.
When taking into account AAR
adjustments under § 301.6227–3,
partners must adhere to the consistency
requirements under section 6222(a). See
§ 301.6222–1(a)(4) (providing
consistency requirement applies to the
treatment of a partnership-related item
on an AAR). Nothing in sections 6222,
6223(b), or 6227, however, precludes a
partner from notifying the IRS the
partner is taking an adjustment into
account inconsistently with how the
adjusted item was treated in an AAR.
While section 6227 imposes certain
requirements with respect to AARs,
none of those requirements contradict
section 6222(c)’s exception to the
consistency requirement. Accordingly,
the final regulations under § 301.6222–
1(c)(2) remove the language stating that
the provisions of § 301.6222–1(c)(1) do
not apply with respect to a partner’s
treatment of a partnership-related item
reflected on an AAR. In addition, the
final regulations under § 301.6227–1
remove the rule under proposed
§ 301.6227–1(f) regarding the binding
nature of an AAR. As a result of these
changes, a partner may notify the IRS it
is treating an AAR-adjusted item
inconsistently in accordance with the
provisions of § 301.6222–1(c).
The final regulations under
§ 301.6222–1(c)(2) maintain the
language stating that the provisions of
§ 301.6222–1(c)(1) do not apply to a
partner’s treatment of an item reflected
on a statement under section 6226 filed
by the partnership with the IRS. A
cross-reference to § 301.6226–1(e) was
also added. In addition, the final
regulations clarify that the provisions of
§ 301.6222–1(c)(1) do not apply to any
item the treatment of which is binding
on the partner because of an action
taken by the partnership or because of
a final decision in a proceeding under
the centralized partnership audit regime
with respect to the partnership. Section
6223(b). Items reflected on a statement
under section 6226 filed with the IRS
are an example of such items.
C. Inconsistent Treatment When No
Partnership Return is Filed
Proposed § 301.6222–1(a)(3) provided
that 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
in accordance with proposed
§ 301.6222–1(c). One comment
recommended that the regulations
include an example to illustrate the
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6475
outcome of the application of the rule
under proposed § 301.6222–1(a)(3). The
comment observed that without a return
filed by the partnership, there would
not be a return with which to make the
partner’s return consistent. To illustrate
the application of § 301.6222–1(a)(3),
Example 7 was added under
§ 301.6222–1(a)(5).
In light of the comment, the final
regulations under § 301.6222–1(b)(1)
include the clarification that where a
partnership has failed to file a return,
any treatment of a partnership-related
item on a partner’s return may be
removed, and the IRS may determine
any underpayment of tax resulting from
such adjustment.
Lastly, the final regulations eliminate
the phrase ‘‘unless the partner files a
notice of inconsistent treatment in
accordance with proposed § 301.6222–
1(c)’’ from proposed § 301.6222–1(a)(3).
This change clarifies that a partner’s
treatment of an item attributable to a
partnership that has not filed a return is
per se inconsistent, even if the partner
notifies the IRS of the inconsistent
treatment. The notification under
§ 301.6222–1(c) turns off the
consistency requirement, but it does not
change, as a factual matter, that the
partner reported inconsistently.
D. Form and Method for Identifying
Inconsistent Treatment of a PartnershipRelated Item
Under proposed § 301.6222–1(c)(1), in
addition to the requirement that a
statement identifying an inconsistent
treatment must be attached to the
partner’s return on which the item is
treated inconsistently, the statement
must be provided to the IRS according
to the forms, instructions, and other
guidance prescribed by the IRS. One
comment asked about the form and
method for providing the IRS with the
statement described in proposed
§ 301.6222–1(c)(1) and suggested
specific format guidance in the
regulations would assist the public in
reporting an inconsistent treatment.
This comment was not adopted.
The final regulations maintain the
rule that a partner must provide the
statement described in § 301.6222–
1(c)(1) in accordance with forms,
instructions, and other guidance
prescribed by the IRS. Prescribing the
form and method for notifying the IRS
of inconsistent treatment through forms,
instructions, and other sub-regulatory
guidance allows the IRS the flexibility
to update its procedures for identifying
an inconsistency as appropriate and
necessary without the IRS having to
amend the regulations. This flexibility
preserves government resources and
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also expedites the guidance process for
taxpayers to be aware of changes in IRS
procedures. Accordingly, the final
regulations do not provide a specific
form or method for identifying
inconsistent treatment.
The same comment asked whether a
statement identifying inconsistent
treatment can only be filed
contemporaneously with the partner’s
tax return. Proposed § 301.6222–1(c)
provided that a statement does not
identify an inconsistency unless it is
attached to the partner’s return on
which the partnership-related item is
treated inconsistently. Because the plain
language of proposed § 301.6222–1(c)
made clear that the statement
identifying inconsistent treatment must
be attached to a return, no change was
made in response to this comment.
E. Proceeding To Adjust an Identified,
Inconsistently Reported Item
If a partner fails to satisfy the
requirements of § 301.6222–1(a), 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, unless the partner
provides notice of the inconsistent
treatment in accordance with
§ 301.6222–1(c). See § 301.6222–1(b).
Under proposed § 301.6222–1(c)(4)(i), if
a partner notifies the IRS of an
inconsistent treatment of a partnershiprelated item in accordance with
proposed § 301.6222–1(c)(1) and the IRS
disagrees with that inconsistent
treatment, the IRS may adjust the
identified, inconsistently reported item
in a proceeding with respect to the
partner. Nothing in proposed
§ 301.6222–1(c)(4)(i) precluded the IRS,
however, from also conducting a
proceeding with respect to the
partnership.
One comment recommended that
§ 301.6222–1(c)(4)(i) provide that if the
IRS does conduct a proceeding with
respect to the partnership to adjust an
identified, inconsistently reported item,
the IRS may include within that
proceeding the partner who provided
notice of inconsistent treatment. The
comment was concerned that the
regulations provided partners who
identified inconsistent treatment an
automatic right to contest the IRS’s
adjustment through deficiency
proceedings, which would result in
more partner-level proceedings and
which would be contrary to the intent
of the centralized system. According to
the comment, the recommended rule
would allow the IRS to avoid
conducting separate partnership and
partner proceedings by allowing the IRS
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to include notifying partners in the
partnership-level proceeding, rather
than engaging such partners through
deficiency procedures.
Proposed § 301.6222–1(c)(4)(i)
provided that the IRS may adjust an
identified, inconsistently reported item
in a proceeding with respect to the
partner. The IRS is not required to make
that adjustment. The IRS may instead
choose to make the adjustment in a
proceeding with respect to the
partnership. To the extent the comment
was suggesting the IRS must adjust an
identified, inconsistently reported item
in a proceeding with respect to the
partner, the comment was not correct.
If the IRS conducts a proceeding with
respect to the partnership, that
proceeding will include only the IRS,
the partnership, and the partnership
representative who is acting on behalf of
the partnership. No partner, except a
partner that is the partnership
representative, or any other person may
participate in the partnership
proceeding without permission of the
IRS. See § 301.6223–2(d)(1).
Accordingly, while a partner is not
generally included in a proceeding with
respect to the partnership under the
centralized partnership audit regime,
the IRS has the authority under
§ 301.6223–2(d)(1) to allow any other
person, including a partner who notified
the IRS of inconsistent treatment, to
participate in a partnership-level
proceeding. Because that authority
exists under § 301.6223–2, a separate
rule within § 301.6222–1 to allow
notifying partners to be included in a
partnership-level proceeding is
unnecessary. Therefore, the revision to
proposed § 301.6222–1(c)(4) as
recommended by the comment was not
adopted.
All partners, including partners that
have filed a notice of inconsistent
treatment, are bound by the actions of
the partnership and any final decision
in a proceeding with respect to the
partnership under the centralized
partnership audit regime. See section
6223(b). To clarify the application of
this rule in the case of a partnershiplevel proceeding to adjust an identified,
inconsistently reported item, proposed
§ 301.6222–1(c)(4) was revised to
provide that where the IRS conducts a
proceeding with respect to the
partnership, and there is no proceeding
with respect to the partner regarding an
identified, inconsistently reported
partnership-related item, the partner is
bound to actions by the partnership and
any final decision in the partnership
proceeding.
Another comment suggested that the
regulations clarify what happens when
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the IRS conducts a proceeding with
respect to the partnership under
§ 301.6222–1(c)(4)(i) and at the
conclusion of that proceeding, the IRS
accepts the partnership return as filed.
The comment suggested the regulations
address what procedures apply for
collection of an imputed underpayment
in that scenario or for collection of tax
from the partner that filed
inconsistently. This comment was not
adopted.
First, because there is no partnership
adjustment in the scenario described,
there is also no imputed underpayment
to collect from the partnership.
Additionally, because there is no
imputed underpayment, the partnership
cannot make a push out election. See
section 4.A.iii of this preamble. With
respect to collection of tax from the
partner, nothing in the regulations
prevents the IRS, when it conducts a
proceeding with respect to the
partnership under § 301.6222–1(c)(4)(i),
from also conducting a proceeding with
respect to the partner to adjust an
identified, inconsistently reported item.
Accordingly, no changes were made in
response to this comment.
F. Consistent Treatment With Schedule
Furnished to the Partner by the
Partnership
Under proposed § 301.6222–1(d)(1), a
partner is treated as having notified the
IRS of treating a partnership-related
item inconsistently if the partner
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 the
partner makes a valid election under
proposed § 301.6222–1(d)(2). This
election must be filed no later than 60
days after the date of such notice.
Proposed § 301.6222–1(d)(2). One
comment recommended that the
regulations provide that this 60-day
period may be extended with approval
by the IRS. This comment was not
adopted.
The IRS may assess and collect any
underpayment of tax resulting from an
adjustment to conform an inconsistent
position in the same manner as if the
underpayment were 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. The 60-day period under
§ 301.6222–1(d)(2) is designed to allow
a partner to demonstrate consistency
with the information furnished to the
partner by the partnership and
corresponds to the 60-day period the
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partner would have had to request
abatement if section 6213(b)(2) were
applicable. Notably, section 6213(b)(2)
does not provide for any extensions of
time. Accordingly, the 60-day period
under § 301.6222–1(d)(2) affords the
partner an opportunity to contest the
IRS’s conforming adjustment the partner
would not have otherwise had.
Additionally, the 60-day period is a
reasonable amount of time for the
partner to demonstrate consistency with
the information it has received from the
partnership. At the time the partner is
notified by the IRS of the inconsistent
treatment, the partner should be in
possession of any statements, schedules,
or forms furnished to the partner by the
partnership. If the partner were
permitted to request abatement, the
partner would likewise only have 60
days. Furthermore, if the partnership is
made aware by the partner that an item
was treated incorrectly on the
partnership return or the schedules
furnished by the partnership, the
partnership has the ability to file an
AAR with respect to the partnershiprelated item.
Another comment suggested guidance
is needed as to how the election under
proposed § 301.6222–1(d)(2) is made.
Proposed § 301.6222–1(d)(2)(i) provided
that the election must be filed in writing
with the IRS office set forth in the notice
that notified the partner of the
inconsistency. Proposed § 301.6222–
1(d)(2)(ii) provided the election must be
clearly identified as an election under
section 6222(c)(2)(B); signed by the
partner making the election;
accompanied by a copy of the incorrect
statement and IRS notice that notified
the partner of the inconsistency; and
include any other information required
in forms, instructions, or other guidance
prescribed by the IRS.
The comment did not suggest what
further guidance should be provided in
the regulations. Deferring further
guidance to forms, instructions, and
other sub-regulatory guidance allows
the IRS the flexibility to update its
procedures as appropriate and necessary
without the IRS having to amend the
regulations. As discussed earlier in this
section of this preamble, this flexibility
preserves government resources and
also expedites the guidance process for
taxpayers to be aware of changes in IRS
procedures. Accordingly, proposed
§ 301.6222–1(d)(2) was not revised in
response to this comment.
G. Effect of Inconsistent Treatment
When Partner is a Partnership
Proposed § 301.6222–1(a)(2) provided
that the rules of § 301.6222–1 apply to
a partnership-partner regardless of
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whether the partnership-partner has
made an election under section 6221(b)
to elect out of the provisions of the
centralized partnership audit regime.
The final regulations clarify that the
rules of § 301.6222–1 apply to all
partners including partnership-partners
that have elected out of the centralized
partnership audit regime and revise the
language referring to such partners to
better conform to similar references in
other regulation sections.
Proposed § 301.6222–1(b)(3) provided
a rule regarding the effect of
inconsistent treatment where the
partner is itself a partnership and also
provided a cross-reference to the rules
under section 6232(d)(1)(B) and
§ 301.6232–1(d). To better conform the
two sets of rules and to reduce any
potential confusion between the
provisions, the final regulations
eliminate the rule under § 301.6222–
1(b)(3) in favor of providing only a
cross-reference to the rules under
section 6232(d)(1)(B) and § 301.6232–
1(d).
3. Determination of an Imputed
Underpayment, Modification of an
Imputed Underpayment, and
Adjustments That Do Not Result in an
Imputed Underpayment
Twenty comments were received
concerning section 6225 and the rules
regarding imputed underpayments. This
section 3 addresses the comments
concerning the determination of an
imputed underpayment under proposed
§ 301.6225–1; modification of an
imputed underpayment under proposed
§ 301.6225–2; and the rules regarding
how adjustments that do not result in an
imputed underpayment are taken into
account in accordance with proposed
§ 301.6225–3. As discussed in the
Background, comments concerning the
rules regarding basis and tax attributes
under proposed § 301.6225–4 will be
addressed in future guidance.
A. Determination of an Imputed
Underpayment
Section 6225(b)(1)(B) provides that
the determination of any imputed
underpayment is made by ‘‘applying the
highest rate of tax in effect for the
reviewed year under section 1 or 11.’’
Consistent with section 6225(b)(1)(B),
proposed § 301.6225–1 provided that an
imputed underpayment is determined
by multiplying the total netted
partnership adjustment by the highest
rate of federal income tax in effect for
the reviewed year under section 1 or 11
and increasing or decreasing that
product by certain adjustments to
credits and creditable expenditures.
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One comment stated that the statute’s
use of the highest marginal tax rate to
calculate the imputed underpayment is
unfair to taxpayers who may not be
taxed at the highest marginal rate,
particularly with respect to adjustments
for qualified dividends or capital gains,
where a partner is subject to the
alternative minimum tax, or where a
partner is a tax-exempt entity. To the
extent the comment was suggesting that
the regulations use a rate different than
the rate prescribed in the statute to
compute an imputed underpayment, the
comment was not adopted. Section
6225(b)(1)(B)’s mandate to ‘‘apply the
highest rate of tax in effect for the
reviewed year under section 1 or 11’’ is
unambiguous, and there is no exception
from application of the highest rate for
any particular partnership or for any
specific type of partner, such as an
exception that takes into account unique
circumstances of specific partners.
Because application of the highest rate
is established by statute, the regulations
also apply the highest rate of tax to
determine an imputed underpayment
under section 6225(b).
A partnership and its partners may be
able to reduce the rate used in
computing an imputed underpayment
by requesting modification under
section 6225(c). For example, the
partnership may request modification
under § 301.6225–2(d)(3) with respect to
partnership adjustments that are
allocable to a tax-exempt entity or
modification under § 301.6225–2(d)(4)
with respect to adjustments to capital
gains or qualified dividends that are
attributable to an individual. The
partnership may also make a push out
election under section 6226, allowing
partners to take into account the
adjustments and pay tax using their
respective marginal tax rates, including
taking into account the effect of the
alternative minimum tax.
Proposed § 301.6225–1(a)(1) provided
that each imputed underpayment
determined under § 301.6225–1 is based
solely on partnership adjustments with
respect to a single taxable year. One
comment recommended that the
regulations allow adjustments that move
income or expense from one year to
another to be netted for purposes of
computing the imputed underpayment
amount. This comment was not
adopted.
The comment described an example
in which the IRS determines that the
partnership should have reported
income in year 1 that was originally
reported in year 2. The increase in
income for year 1 results in an imputed
underpayment. The decrease in income
in year 2 is an adjustment that does not
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result in an imputed underpayment
pursuant to § 301.6225–1(f)(1)(i), and
the partnership and its partners take
into account the decrease in income in
the adjustment year pursuant to
§ 301.6225–3. One partner in the
comment’s example reports income
from other sources in the adjustment
year; the other partner does not report
income from other sources.
Section 6225(b) sets forth the rules for
determining an imputed underpayment.
The statutory structure of section
6225(b) is premised on the concept that
an imputed underpayment is
determined with respect to a reviewed
year and that adjustments with respect
to the reviewed year result in such
imputed underpayment or are
adjustments that do not result in an
imputed underpayment. Section
6225(a). Section 6225(b)(1)(A) expressly
provides that ‘‘any imputed
underpayment with respect to any
reviewed year shall be determined by
the Secretary by appropriately netting
all adjustments with respect to such
reviewed year . . . .’’ (emphasis added).
The statute does not reference
adjustments with respect to any year
other than the reviewed year.
Accordingly, a rule that allows for the
netting of adjustments across tax years
is not consistent with the statutory
language of section 6225(b)(1)(A).
In addition, netting across multiple
tax years would not constitute
‘‘appropriately netting’’ within the
meaning of section 6225(b)(1)(A). A
fundamental federal income tax
principle is that each taxable year
stands alone. Commissioner v. Sunnen,
333 U.S. 591 (1948) (‘‘Income taxes are
levied on an annual basis. Each year is
the origin of a new liability and of a
separate cause of action.’’). A rule that
provides for netting across tax years
ignores this fundamental principle. For
netting to be appropriate, it must take
into account general principles of
federal income tax laws as well as the
provisions of the Code. Allowing an
adjustment from one taxable year to
offset or net with an adjustment from
another taxable year when determining
an imputed underpayment contravenes
both the general tax principle that each
year stands alone and is not supported
by the plain language of section 6225.
These principles are particularly
significant in the context of partnerships
given that partners’ interests and the
identity of partners can vary from year
to year. Because adjustments relating to
multiple years may affect items that are
allocable to different partners or in
different amounts, it would be
particularly inappropriate to offset those
types of adjustments against each other
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when determining the imputed
underpayment.
Furthermore, a timing adjustment,
such as the one described in the
comment’s example, often has effects
that must be reflected in each taxable
year’s return. Allowing such
adjustments to net against each other
could inappropriately negate those
effects. For instance, an adjustment that
shifts a depreciation deduction from one
year to another year might have the
effect of changing a taxpayer’s status
from being in a loss posture to being in
a gain posture for the year from which
the loss is being shifted. Although in
some cases a gain in one year might
effectively offset a loss in another year,
such a result cannot be known without
an analysis of each of the partners’
specific circumstances. As discussed
later in section 3.A.i. of this preamble,
requiring the IRS to review each
partner’s specific circumstance in order
to determine the imputed
underpayment is the type of inquiry that
the centralized partnership audit regime
was designed to avoid.
A rule that allows for automatic
netting of adjustments across tax years
also ignores the limitation in section
6225(b)(4) and would create significant
administrative burdens for the IRS.
Section 6225(b)(4) provides that if any
adjustment would result in a decrease in
the amount of the imputed
underpayment and could be subject to
any additional limitation under the
Code if taken into account by any
person, such adjustment should not be
taken into account in the netting process
described in section 6225(b)(1)(A). This
provision codifies the presumption that,
except as otherwise provided, taxpayer
favorable adjustments subject to any
possible limitation under the Code if
taken into account by any person are
disregarded when determining an
imputed underpayment. The statute
does not require the IRS to determine
whether taxpayer favorable adjustments
are in fact subject to such limitations. A
rule allowing for netting across tax years
would, however, require the IRS to
make such determinations. This would
have the effect of inappropriately
expanding the number of tax years and
partnership adjustments potentially at
issue in the partnership-level
proceeding. Not only would that result
undermine the limitation under section
6225(b)(4), it would also unnecessarily
complicate the partnership examination,
creating potential burdens for both the
IRS and the partnership.
A rule allowing adjustments to offset
across years would also create
administrative burdens for both the IRS
and for taxpayers because it would
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require determining the identity of the
partners affected by the adjustment.
While in some cases a lack of partner
turnover may make that determination
less burdensome, in other cases where
there is a high turnover of partners or
where special allocations are involved,
the determination becomes more
difficult. Establishing a rule that allows
netting of adjustments across tax years
as a general matter fails to take into
account the differing make-up of
partnerships and their partners. For
instance, assume a case where there is
a high turnover of partners, adjustments
are determined across multiple
reviewed years, and the rules allow
netting of those adjustments to form a
single imputed underpayment. If the
partnership requested to modify that
imputed underpayment, it would be
unclear which partners would be
required to participate in modification
and if the partnership made a push out
election with respect to the imputed
underpayment, it would be unclear
which partners would be furnished
statements under § 301.6226–2.
Lastly, as a practical matter, the IRS
may not examine each relevant
partnership taxable year. If an
adjustment results in moving a
partnership-related item from one
taxable year to another, the IRS may
examine the other taxable year, but the
IRS is not required to. Providing a rule
requiring the IRS to take into account
other taxable years when netting
adjustments would effectively require
the IRS to examine all of the
partnership’s open taxable years, which
would result in a significant
administrative burden to the IRS and
the partnership subject to the
administrative proceeding. If netting
across tax years was allowed, but the
IRS did not examine all relevant years,
different partnerships would receive
different, and potentially distorted,
netting results. For instance, a
partnership under examination for
multiple taxable years could potentially
benefit from netting across those taxable
years, but a partnership under
examination for only one taxable year
would not receive the same benefit. The
determination of an imputed
underpayment amount for any one year
should not be dependent on the number
of partnership taxable years the IRS
examines.
Accordingly, a rule that allows
adjustments to net across taxable years
is inconsistent with the statutory
language of section 6225(b)(1)(A),
contravenes general tax principles,
creates administrative burdens for the
IRS, and inappropriately affects the
timing and netting of certain
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partnership-related items. Therefore, the
final regulations under § 301.6225–
1(a)(1) maintain the requirement that an
imputed underpayment be based solely
on partnership adjustments with respect
to a single taxable year.
i. Grouping, Subgrouping, and Netting
of Partnership Adjustments
Several comments provided
recommendations regarding the
grouping, subgrouping, and netting
rules under proposed § 301.6225–1(c),
(d), and (e). In order to determine an
imputed underpayment, each
partnership adjustment determined by
the IRS is first placed into one of four
groupings pursuant to § 301.6225–1(c)
according to the type of partnershiprelated item being adjusted: The
reallocation grouping, the credit
grouping, the creditable expenditure
grouping, or the residual grouping.
Adjustments are then subgrouped, if
appropriate, and netted to produce the
total netted partnership adjustment.
Proposed § 301.6225–1(b)(2), (d) and (e).
One comment stated that the grouping
and netting procedures are broad, vague,
and generally err on the side of
maximizing tax revenue resulting from
an audit without regard to generally
applicable provisions of the Code. The
design of section 6225(a) and (b) and the
grouping and netting rules under
§ 301.6225–1 is to create an imputed
underpayment amount that is based on
the highest rate of tax and that
disregards any taxpayer favorable
adjustments which would otherwise
reduce the imputed underpayment.
Given this formula, an imputed
underpayment determined under
§ 301.6225–1 will likely reflect an
amount that is larger than the
cumulative amount of tax the partners
would have paid if the partners took the
partnership adjustments into account
separately.
This formula is a feature of section
6225(a) and (b). The statute expressly
disregards certain adjustments that may
be subject to limitations and that would
otherwise reduce the imputed
underpayment and mandates the
application of the highest applicable tax
rate. Section 6225(b)(1)(B), (2) and (4).
The proposed regulations followed
these statutory mandates. By removing
the obligation on the IRS to consider
partners’ facts and circumstances, such
as whether adjustments that would
otherwise reduce the imputed
underpayment might be allowed at the
partner level or whether adjustments
might be taken into account by partners
at a rate lower than the highest rate,
section 6225(b) shifts the burden from
the IRS during this phase of a
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partnership examination. Because the
imputed underpayment determined at
this phase in the examination is not
required to reflect the facts and
circumstances of the ultimate partners,
modifications may be necessary to more
closely reflect the proper tax treatment.
After the preliminary determination
of the imputed underpayment amount
under § 301.6225–1, the burden is
shifted to the partnership to utilize the
modification procedures under
§ 301.6225–2 if the partnership so
chooses. Modification is designed to
allow the partnership and its partners to
arrive at an imputed underpayment
amount that is closer to the correct
amount of tax while maintaining the
assessment and collection efficiencies of
a centralized audit process. See Joint
Comm. on Taxation, JCS–1–16, General
Explanations of Tax Legislation Enacted
in 2015, 65–66 (2016) (JCS–1–16). As an
alternative to modification and paying
an imputed underpayment, the
partnership can elect under section
6226 to push out the adjustments to its
partners. Both modification and the
push out election provide the
opportunity to establish that the correct
amount of tax is collected from the
partnership and its partners.
Accordingly, the final regulations under
§ 301.6225–1 were not revised in
response to the comment’s concern
about maximizing revenue.
With respect to the comment’s
concerns that the grouping and netting
procedures are broad and vague and
disregard generally applicable tax laws,
to the extent those concerns related to
the scope of the centralized partnership
audit regime and what determinations
and adjustments are made at the
partnership level, see section 1 of this
preamble. To the extent the comment’s
concerns related to the fact that the
regulations do not address every
possible grouping and netting scenario,
the regulations do so intentionally. The
Treasury Department and the IRS have
determined it is not reasonable to
identify within the regulations all
possible permutations of adjustments
and partnership facts and circumstances
that might affect how an imputed
underpayment is calculated.
Accordingly, the regulations provide
general rules that apply to various
scenarios that could arise in the
examination process. The general nature
of the grouping, subgrouping, and
netting rules also allow for the
regulations to adapt to future changes to
the Code.
Notwithstanding the rules’ flexible
nature, they are rooted in provisions of
the Code and regulations that are
generally applicable to partnerships and
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partners. The regulations require that
adjustments be placed into groupings
and subgroupings based on how the
adjusted items are treated pursuant to
the Code, the regulations, forms,
instructions, and other guidance and do
not generally permit the netting of
adjustments that might otherwise be
subject to limitations or restrictions
under the tax laws. Accordingly, the
grouping and netting rules are designed
with regard to generally applicable
provisions of the Code. For further
discussion of the comment’s concerns
regarding the grouping and netting rules
and the interaction with generally
applicable tax laws, see section 3.A.ii. of
this preamble.
One comment suggested that the
regulations should allow partners to
supply information to the partnership
and require that the partnership and the
IRS apply this information in
calculating the imputed underpayment.
The comment also suggested there be a
procedure for partners who are passive
investors with respect to the partnership
to have an opportunity to claim passive
losses for net partnership adjustments
on audits that increase income and
cause the partnership to pay tax on their
behalf.
As discussed earlier in this section of
this preamble, the tax attributes of the
partnership’s partners generally do not
factor into the preliminary
determination of the imputed
underpayment. Rather, the imputed
underpayment determined under
§ 301.6225–1 is computed without
regard to the partners’ tax
circumstances, for example whether a
partner would be able to offset
additional partnership income with
additional deductions or whether a
partner’s tax attributes would reduce the
amount of tax due as a result of the
adjustments. See section 6225(b)(1)(B),
(2) and (4). Modification as described
under section 6225(c) and § 301.6225–2
is the more appropriate stage of the
examination for the IRS to take into
account specific partner tax attributes.
Requiring the IRS to review the tax
attributes of each partner within the
context of the first phase of the
partnership examination would
undermine the centralized nature of the
examination process. The comment’s’
recommendation to allow partners to
present information during the
partnership audit and require the IRS to
incorporate that information into the
imputed underpayment calculation
would require the IRS to review and
evaluate partner tax attributes in a way
that would significantly impede upon
the exam and create numerous
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administrative burdens for the
government.
Notwithstanding these challenges,
proposed § 301.6225–1(c)(1) and (d)(1)
provided that the IRS may, in its
discretion, place adjustments in
groupings and subgroupings in a
manner different from that described in
the proposed regulations to
appropriately reflect the facts and
circumstances of each examination.
This rule is intended to allow the
partnership to provide information to
the IRS to demonstrate that certain
partner tax attributes should be taken
into account when grouping and
subgrouping to achieve a more
appropriate netting of the adjustments.
The regulations give the IRS the
discretion to decide whether or not to
use this information in the initial
examination phase, that is, prior to
modification. This discretion is
necessary because the partnership and
the IRS may not agree as to whether the
groupings and subgroupings requested
by the partnership are appropriate.
Requiring the IRS and the partnership to
resolve such disagreements within the
context of the first phase of the
partnership proceeding would take time
and resources away from the audit and
thereby recreate the same problems
associated with introducing partner tax
attributes into the partnership level
exam. If the partnership and the IRS do
not agree on the groupings and
subgroupings recommended by the
partnership during the exam, the
partnership is not without recourse. The
partnership may request during
modification that the IRS include one or
more partnership adjustments in a
particular grouping or subgrouping or
request that certain partnership
adjustments be treated as if no
limitations or restrictions apply with the
result those adjustments may be
subgrouped with other adjustments. See
§ 301.6225–2(d)(6).
Accordingly, modification is generally
the appropriate point in the
administrative phase at which partner
tax attributes may be raised by the
partnership and considered by the IRS.
For example, the partnership and its
partners can utilize the amended return
procedure or the alternative procedure
to filing amended returns, which require
partners to take the adjustments into
account in light of their individual tax
attributes. Those procedures would
potentially allow partners to offset
passive income with any passive losses,
consistent with the procedure
recommended by the comment. In the
alternative, the partnership may elect to
push out the adjustments under section
6226, and the partners would be
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required to take into account the
adjustments and any effects on the
partners’ tax attributes. At that stage, the
partners could use passive losses to the
extent permitted by the rules under
§ 301.6226–3 (regarding how partners
take into account pushed out
adjustments).
Although the IRS is permitted to
consider partner tax attributes during
the first phase of the partnership exam,
the statute and the regulations provide
clear guidance on the modification
process and specifically how a
partnership may request that partners’
tax attributes be taken into account to
reduce the imputed underpayment.
Limiting the requirement that the IRS
consider such information to the
modification stage is efficient for both
the IRS and the partnership because it
ensures that the first phase of the exam
is focused on the substance of what
adjustments must be made at the
partnership level, rather than on
specific partner attributes.
For these reasons, the comment
suggesting a rule that permits partners,
as a matter of right, to present
information regarding their tax
attributes during the partnership audit
is not adopted. However, a partnership
may request that the IRS take into
account facts and circumstances relating
to its partners pursuant to the rules
under § 301.6225–1(d)(1) and (e)(1),
which may allow for more appropriate
grouping and subgroupings of
adjustments. The comment’s
recommendation that the IRS be
required to apply such information
during the netting process was not
adopted. The partnership may, however,
request during modification to reduce
the amount of the imputed
underpayment based on the partners’
specific tax attributes.
Another comment stated the proposed
regulations create a divergence between
the imputed underpayment amount and
the cumulative amount that the
reviewed year partners would have to
pay if the adjustments were allocated to
them. The comment described two
situations to illustrate this concern. In
the first situation, one adjustment
increases ordinary income, and another
adjustment decreases capital gain. The
comment concludes that because the
proposed regulations do not allow the
decrease in capital gain to be netted
against the increase in ordinary income,
the partners may have overpaid tax with
respect to the capital gain. In the second
situation, one adjustment increases
capital gain, and another adjustment
decreases ordinary income. The
comment concludes that because the
proposed regulations do not allow the
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decrease in ordinary income to be
netted against the increase in capital
gain, the partners may have overpaid tax
with respect to the ordinary income.
The comment suggested that the
Treasury Department and the IRS
should ensure that the government does
not seek an increase in tax collections
solely because the partnership bears the
burden for the tax. This comment was
not adopted because its conclusions are
based on assumptions that may not
apply in all situations and section
6225(b)(1)(A) requires that adjustments
are ‘‘appropriately netted’’ taking into
consideration the further limitation of
section 6225(b)(4) which does not
permit the netting of adjustments that
would reduce the imputed
underpayment with other adjustments.
The comment’s suggestion presents the
same issues described earlier in this
section of the preamble regarding the
introduction of partner tax information
in the partnership level proceeding.
The comment’s conclusions that the
partners may have overpaid tax with
respect to the decreased capital gain or
the decreased ordinary income may be
true in some cases. Without a review of
the partners’ accounts or some
affirmation from the partners that they
did pay tax, the IRS cannot be certain
this is true in all cases or any one
particular case. For example, a partner
may have been in an overall loss
position for the taxable year, may not
have originally reported the decreased
item, or may not have filed a return. As
discussed earlier in this section of this
preamble, the initial phase of the
examination is not designed for the IRS
to consider the specific circumstances of
any partners. A rule requiring the IRS to
consider specific partner circumstances
would require the IRS to review each
partner’s account and prior returns to
ensure that the partner previously took
an item into account and paid tax on
that item. Such a rule would create
significant burden on the IRS during the
initial exam phase and undermine a
core aspect of the centralized
partnership audit regime’s shifting of
the burden from the IRS to the
partnership and its partners. As
discussed earlier in this section of this
preamble, a partnership may request
that tax attributes are accounted for by
using the modification procedures or
the partnership may make the election
under section 6226.
The comment also appears to
conclude that if all partnership
adjustments were netted, the imputed
underpayment would result in some
number closer to the amount the
reviewed year partners would have to
pay if the adjustments were allocated to
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them. While this may be true in some
cases, it would not occur in all
situations. For instance, assume the
partner in the first situation described
by the comment had not reported and
paid tax with respect to the capital gain
that was then decreased on
examination. If the regulations
permitted the decreased capital gain to
be fully netted against the increased
ordinary income, the result may lead to
little or no imputed underpayment,
even though the partner had not paid
tax on the capital gain that was reduced.
In that case, no tax was paid by the
partner on the capital gain (as originally
allocated to the partner) and no tax was
paid by the partnership with respect to
the increased ordinary income, even
though the partnership had additional
ordinary income that should have been
allocation to the partner. While the
comment stated that the netting process
under proposed § 301.6225–1
eliminated situations that would benefit
the taxpayer, the comment did not
acknowledge that the statutory structure
of section 6225 mandates this result.
The comment also does not
acknowledge that the netting process as
enacted in the statute and implemented
in the regulations also protects the IRS,
for instance in cases where the partner
did not pay tax on an adjusted item.
During the initial phase of determining
the imputed underpayment, the rules
should not require the IRS to take steps
to ameliorate a potential discrepancy in
payment amounts based on facts
applicable in one situation if the rule
would result in distortions for taxpayers
with different facts.
As discussed earlier in this section of
this preamble, ‘‘appropriately netting’’
within the meaning of section
6225(b)(1)(A) means, as a general
matter, that when netting partnership
adjustments for purposes of determining
an imputed underpayment, all
limitations under the Code should be
considered, including limitations that
would otherwise prevent the
partnership from netting certain items.
Section 6225(b)(4)’s rule regarding
taxpayer favorable adjustments subject
to additional limitations under the Code
if taken into account by any person
supports this interpretation. Because
certain items could be subject to
limitations in the hands of certain
partners, the statute requires that
limitations be accounted for by
assuming they exist for purposes of
determining the imputed underpayment
during the initial stage of the
examination. The partnership may
ameliorate any discrepancies caused by
that assumption by demonstrating that
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no such limitations exist either under
§ 301.6225–1(d)(1) or (e)(1) or in the
modification phase. The partnership can
also make the election under section
6226, and the partners will account for
such limitations when taking into
account the adjustments.
The comment suggested specific
approaches to ameliorate the concerns it
raised. First, it suggested a rule that
would allow an ordinary income
grouping to be reduced by a capital loss
grouping to the extent of $3,000 per
direct or indirect individual partner.
Second, it suggested a rule that would
apply the applicable rate for net
negative adjustments to the relevant
subgrouping and allow this amount to
reduce the imputed underpayment
amount. Neither of these specific
recommendations was adopted.
The Code permits corporate taxpayers
to deduct capital losses to the extent of
capital gains. Section 1211(a). In the
case of taxpayers other than
corporations, the Code allows a
deduction for any capital loss exceeding
capital gain up to $3,000 ($1,500 in the
case of a married individual filing
separately). Section 1211(b). A rule
allowing an offset of $3,000 against an
increase in ordinary income in the
situations described by the comment
would require the IRS to first determine
that the partners in the partnership are
taxpayers other than corporations such
that the rules under section 1211(b)
apply. While this may be a relatively
simple determination in some cases,
requiring the IRS to engage in making
the determination contravenes the
principle that partners’ tax attributes,
including partner identity, are generally
not accounted for in the initial imputed
underpayment calculation.
To the extent the rule recommended
by the comment is based on the premise
that each partner would be entitled to a
$3,000 capital loss, that premise is
faulty. One, such a rule would require
the IRS to know whether there are no
other capital gains (related or unrelated
to the partnership) against which the
non-corporate partners would first be
required to offset the additional capital
loss. Two, the rule would require the
IRS to consider whether the partner was
not an individual subject to the lower
deduction amount of $1,500 allowed by
section 1211(b). This process would
become more burdensome as the
number of partners and tiers increased.
Accordingly, this comment was not
adopted. To extent that this comment
recommended a rule that allowed more
flexibility for the IRS to group
adjustments according to the facts and
circumstances of the partners, that rule
is reflected in proposed § 301.6225–
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6481
1(d)(1) and (e)(1) as revised in the
August 2018 NPRM. A partnership that
wishes to request that the IRS take into
account its partner’s tax circumstances,
including that certain partners are
otherwise entitled to a capital loss
deduction under section 1211(b), may
utilize the discretionary grouping and
subgrouping rules under § 301.6225–
1(d)(1) and (e)(1) or make a modification
request under § 301.6225–2(d)(6).
With respect to the recommendation
that the regulations apply the applicable
rate for net negative adjustments to the
relevant negative subgrouping and allow
this amount to reduce the imputed
underpayment amount, this
recommendation was also not adopted;
however, the final regulations allow for
the result requested by the comment
depending on the facts and
circumstances. The comment suggests
that the rate used in determining an
imputed underpayment should be
applied to negative adjustments that
would otherwise be adjustments that do
not result in an imputed underpayment
and allow those negative adjustments to
net with other positive adjustments in
an effort to calculate an amount that
would more closely reflect what the
partners would have paid if they had
properly reported the adjusted items.
Section 6225(b)(1) provides that the
imputed underpayment is determined
by appropriately netting all partnership
adjustments and applying the highest
rate of tax under section 1 or 11. Section
6225(b)(3) requires that the partnership
adjustments are first 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. When
‘‘appropriately netting’’ under section
6225(b)(1)(A), section 6225(b)(4)
requires that negative adjustments that
could be subject to any limitation or
restriction if taken into account by any
person be disregarded unless provided
otherwise by regulation. The regulations
incorporate this rule in § 301.6225–
1(d)(3). The regulations also provide the
ability, however, to take facts and
circumstances into account to allow
negative or downward adjustments,
where appropriate, to be subgrouped
and thus netted with other adjustments.
See § 301.6225–1(d)(1). For these
reasons, the final regulations maintain
the process for subgrouping and netting
as provided for in the proposed
regulations.
ii. Subgrouping Principles
Before being revised in the August
2018 NPRM, former proposed
§ 301.6225–1(d) had provided that after
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grouping the adjustments, partnership
adjustments are further subgrouped
based on preferences, limitations,
restrictions, and conventions, such as
source, character, holding period, or
restrictions under the Code applicable
to such items. One comment stated that
the proposed grouping and subgrouping
rules under former proposed
§ 301.6225–1(d) unfairly removed many
relevant distinctions between different
types of items and adjustments and
netted items that do not properly net
against each other at the entity level,
including intangible drilling costs,
section 1231 gains and losses, and
whether a particular partner is
considered active or passive in his or
her relationship to the partnership.
Another comment recommended that
the final regulations should also include
a clear statement that the netting
process will be applied in accordance
with generally applicable tax law. Both
comments are addressed by the
amendments made by the TTCA to
section 6225(b).
Section 202(a) of the TTCA added
section 6225(b)(3) to provide that
partnership adjustments 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.
Former proposed § 301.6225–1(d) was
revised in the August 2018 NPRM to
account for the additions of sections
6225(b)(3) and (4). Proposed
§ 301.6225–1(d)(3)(i) provided that
adjustments are subgrouped, when
appropriate, 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. By
separating adjustments into
subgroupings according to how and
whether the adjustments would be
separately stated pursuant to section
702(a), the rules under § 301.6225–
1(d)(3)(i) ensure that items that do not
properly net against each other at the
partnership level under section 702(a)
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do not net against each other for
purposes of determining an imputed
underpayment.
For example, under § 301.6225–1(c) a
positive adjustment to intangible
drilling costs and a negative adjustment
to gain or loss from a sale of property
described in section 1231 are both
placed in the residual grouping.
Pursuant to § 301.6225–1(d)(3)(i), each
adjustment is then placed in a separate
subgrouping to reflect that one
adjustment is a negative adjustment and
that the items being adjusted are
required to be separately stated
pursuant to section 702(a). See section
702(a)(3), § 1.702–1(a)(8)(i). Under
§ 301.6225–1(e)(1), adjustments from
separate subgroupings cannot be offset
against one another. Accordingly, just as
a positive amount of intangible drilling
costs would not be netted with a section
1231 loss under section 702(a), a
positive adjustment to intangible
drilling costs would not net against a
negative adjustment to 1231 gain or loss
for purposes of determining an imputed
underpayment.
Some items that are not separately
stated pursuant to section 702(a) may
nevertheless be subject to other
limitations under the Code or may not
otherwise be allowed to net against
ordinary income. To account for those
types of limitations, proposed
§ 301.6225–1(d)(3)(i) further provided
that 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 its own separate subgrouping. For
example, an increase in loss attributable
to a trade or business activity of the
partnership may not be deductible in
the hands of a particular partner
because that partner did not materially
participate in the partnership activity.
See section 469. Because the loss may
be limited in the hands of a particular
partner, the increase in loss is placed in
its own separate subgrouping to prevent
any inappropriate netting against an
adjustment increasing income of the
partnership.
Accordingly, both the comment
expressing concerns about the netting of
items that do not properly net against
each other at the entity level and the
comment suggesting the regulations
apply general principles of tax law were
addressed by the changes to section
6225 in the TTCA and the subgrouping
rules under § 301.6225–1(d)(3)(i) as
revised in the August 2018 NPRM. As
a result, the final regulations were not
revised in response to these comments.
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Generally, under § 301.6225–1(d),
reallocation adjustments must be placed
into their own subgroupings, but there
is an exception for when multiple
reallocation adjustments apply to a
single partner or group of partners.
Proposed § 301.6225–1(d)(3)(ii)
provided that 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
§ 301.6225–1(d)(3)(i) and netted in
accordance with § 301.6225–1(e).
Proposed § 301.6225–1(d)(3)(iv)
provided a similar rule with respect to
recharacterization adjustments.
In January 2017, a prior version of the
June 2017 NPRM was made publicly
available but was not published in the
Federal Register. The unpublished
version of the June 2017 NPRM
contained an example under former
proposed § 301.6225–1(f) (former
Example 3) which was not contained in
the June 2017 NPRM that was published
in the Federal Register. One comment
recommended that former Example 3 be
added back to the regulations. This
comment was not adopted. The
Treasury Department and the IRS
considered reviving former Example 3,
but because of the changes to section
6225 in the TTCA, former Example 3
did not comport with the statute or the
proposed regulations. Instead of
reviving former Example 3, a new
example was added, Example 12, to
clarify subgrouping principles in the
case of facts similar to, but slightly
different from, the facts in former
Example 3.
One comment recommended that the
regulations clarify whether and under
what conditions positive and negative
adjustments resulting from different
reallocation or recharacterization
adjustments are permissibly placed in
the same subgrouping. The comment
stated that the language of both
proposed § 301.6225–1(d)(3)(ii) and (iv)
seemed to allow the inclusion in the
same subgrouping of unrelated positive
and negative adjustments provided that
all of the adjustments apply to a
particular partner or group of partners.
The comment suggested that the final
regulations include examples clarifying
the proper grouping and netting of
adjustments pursuant to § 301.6225–
1(d)(3). The addition of Example 12
under § 301.6225–1(h) provides the
example suggested by the comment. As
discussed earlier in this section of this
preamble, Example 12 clarifies
operation of the rule under § 301.6225–
1(d)(3)(ii) allowing for adjustments to be
subgrouped together when the
adjustments are allocable to a particular
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partner or group of partners. Although
Example 12 illustrates these concepts in
the context of reallocation adjustments,
the example’s analysis is equally
applicable to recharacterization
adjustments. The result demonstrated
by Example 12 under § 301.6225–1(h) of
the rule under § 301.6225–1(d)(3)(ii) for
reallocation adjustment subgroupings
would not be the result if the negative
adjustments in that example were
subject to limitations described in
section 6225(b)(4) and § 301.6225–
1(d)(3)(i).
iii. Negative Adjustments
Under § 301.6225–1(e), adjustments
from each subgrouping (or grouping if
there is no subgrouping within that
grouping) are netted to produce either a
net positive adjustment or a net negative
adjustment with respect to each
grouping or subgrouping. When
determining an imputed underpayment,
generally only net positive adjustments
are taken into account, and net negative
adjustments are generally treated as
adjustments that do not result in an
imputed underpayment. Adjustments to
credits and creditable expenditures are
treated separately. See section 3.A.vi. of
this preamble.
One comment suggested that the
requirement that only net positive
adjustments are taken into account in
determining an imputed underpayment
will frequently result in double taxation
of the same income items. The comment
cited to Example 4 under proposed
§ 301.6225–1(h) (Example 3 in former
proposed § 301.6225–1(f)) to
demonstrate this point. In Example 4,
the IRS determines that $125 of longterm capital gain should have been
reported as $125 of ordinary income,
resulting in a $125 increase in ordinary
income and a corresponding $125
decrease in long-term capital gain (a
$125 increase in long-term capital loss).
The increase in ordinary income results
in an imputed underpayment, and the
increase in long-term capital loss is an
adjustment that does not result in an
imputed underpayment.
To the extent the comment was
suggesting that the example does not
specify what happens with respect to
the $125 increase in long-term capital
loss, the example was revised in the
August 2018 NPRM to clarify that this
loss is taken into account in accordance
with § 301.6225–3. Under § 301.6225–
3(b), the partnership takes into account
the adjustment increasing long-term
capital loss in the adjustment year.
Alternatively, the partnership may
request modification under section
6225(c) or make a push out election
under section 6226 to ensure that the
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negative adjustment is taken into
account by the partnership’s reviewed
year partners, rather than in the
adjustment year by its adjustment year
partners.
To the extent the comment was
expressing more general concerns about
double taxation, proposed § 301.6225–
1(b)(4) was added in the August 2018
NPRM to provide that if the effect of a
partnership adjustment under chapter 1
of the Code is reflected in another
adjustment taken into account in the
imputed underpayment determination,
the IRS may treat an adjustment as zero
for the purposes of calculating the
imputed underpayment. This rule is
designed to ensure that when
calculating an imputed underpayment,
an adjustment is not counted twice if
the tax effect of that adjustment is
reflected by another adjustment made
by the IRS. A partnership may request
that the IRS utilize this rule to treat an
adjustment as zero if there is the
partnership is concerned about double
taxation. Accordingly, to the extent the
comment was raising concerns about
double taxation, no changes were made
to the regulations in response to the
comment.
The final regulations under
§ 301.6225–1(b)(4) do, however, clarify
that the IRS has the discretion to treat
adjustments as zero for purposes of
determining the imputed underpayment
if the effect of the adjustment under the
Code is reflected in another adjustment.
The language requiring that the
adjustment must have previously been
taken into account under § 301.6225–1
was removed. This change provides the
IRS the discretion to treat a partnership
adjustment as zero in more situations.
For instance, the effect of an adjustment
may be reflected in an adjustment to an
item treated inconsistently under
section 6222(c). The final regulations
under § 301.6225–1(b)(4) also remove
the language limiting the rule’s
application to chapter 1. Under the final
regulations, the rule applies to the effect
of an adjustment under the Code in
general. This change also gives more
flexibility to the IRS to treat partnership
adjustments as zero for purposes of
determining the imputed underpayment
amount.
iv. Other Suggestions Regarding
Grouping and Netting Adjustments
One comment suggested that its
concerns with the grouping and netting
rules might be alleviated by allowing
the partnership to treat the partnership
adjustment as if it arose during the
adjustment year rather than the
reviewed year, which would
synchronize the imposition of the tax in
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the adjustment year with the adjustment
year partners bearing the liability for the
imputed underpayment. This comment
was not adopted because it is contrary
to the plain language of the statute.
Section 6225(a)(1) refers to
adjustments to partnership-related items
‘‘with respect to any reviewed year.’’
Section 6225(b)(1) provides that any
imputed underpayment ‘‘with respect to
any reviewed year’’ shall be determined
by appropriately netting all partnership
adjustments ‘‘with respect to such
reviewed year.’’ In addition, section
6225(d)(2) defines adjustment year to
mean, in the case of an examination, the
year in which an FPA is mailed under
section 6231 or in the case of
adjustment pursuant to a decision in a
proceeding under section 6234, the year
in which the decision is final.
Accordingly, at the time of the
modification phase of the examination,
the adjustment year will not yet be
determined.
If the comment’s suggestion were
adopted and adjustments were treated
as having arisen in the adjustment year,
it is unclear whether the reviewed year
partners’ or the adjustment year
partners’ tax attributes would be
relevant in the modification
determination. The modification period
will in every case come before the
issuance of the FPA. As a result, the
adjustment year will not yet have been
determined, and therefore the
adjustment year partners will not yet be
known. In addition, section 6225(c)(2)
provides the ability for partners to file
amended returns in modification. The
statute’s use of the phrase ‘‘amended
return’’ implies that a prior return must
have been filed. A prior return could not
have been filed for the adjustment year
at this point in the examination because
the adjustment year would not yet be
determined. The partners from the
reviewed year, therefore, must be the
partners that utilize the modification
procedures under section 6225(c)(2)
through the filing of amended returns
for the reviewed year. The reviewed
year partners’ amended returns could
not take into account adjustment year
adjustments and apply them against
reviewed year returns. Accordingly, the
plain language of the statute indicates
that adjustments for purposes of
determining an imputed underpayment
are the adjustments with respect to a
reviewed year, not the adjustment year.
Furthermore, section 6225(a)(1)
provides the partnership shall pay an
amount equal to such imputed
underpayment in the adjustment year as
provided in section 6232. In the case of
adjustments that do not result in an
imputed underpayment, section
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6225(a)(2) provides that such
adjustments shall be taken into account
in the adjustment year. Section
6225(a)(2)’s explicit statement that
adjustments not resulting in an imputed
underpayment are taken into account in
the adjustment year, and the absence of
similar language in section 6225(a)(1)
makes clear that only those partnership
adjustments that do not result in an
imputed underpayment are taken into
account in the adjustment year.
Accordingly, a reasonable reading of
the statutory language of section 6225(a)
supports an interpretation that
adjustments with respect to the
reviewed year should be treated as such
for purposes of determining an imputed
underpayment and not treated as
adjustments arising in the adjustment
year. However, § 301.6225–3 does
provide that adjustments that do not
result in an imputed underpayment are
taken into account in the adjustment
year, that is, when the imputed
underpayment is also required to be
paid. To that extent, any adjustments
that do not result in an imputed
underpayment may mitigate the burden
of the imputed underpayment on
adjustment year partners.
Another comment stated that the time
shifting of the tax on partnership
examination adjustments from the
reviewed year to the adjustment year is
inappropriate and that tax on
partnership examination adjustments
should arise in the reviewed year and
not in the adjustment year. The
comment further states that the burden
of the payment in all cases should fall
directly on the reviewed year partners
and that the rules should require the
reviewed year partners to amend their
reviewed year tax returns to include
their shares of the partnership
examination adjustments. The comment
was not adopted because all of the
changes recommended by the comment
would require amendments to the
statute.
Section 6225 provides that if the
adjustments result in an imputed
underpayment, the partnership shall
pay an amount equal to such imputed
underpayment in the adjustment year as
provided in section 6232. Accordingly,
the year partnerships must pay is, by
statute, the adjustment year, and if the
partnership pays the imputed
underpayment without modification or
does not make an election under section
6226, the statute is designed so that the
adjustment year partners bear the
burden of that payment. See section
6241(4) and § 301.6241–4 (denying any
deduction to the partnership for any
payment made by the partnership,
including the imputed underpayment).
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Additionally, there is no authority
within subchapter C of chapter 63 to
allow the Treasury Department or the
IRS to require that reviewed year
partners file amended returns, though
partners have the option to do so in
modification. The partnership may also
make the election under section 6226
which would result in adjustments
relating to the imputed underpayment
for which the election was made being
taken into account by the reviewed year
partners.
Another comment suggested treating
an audited partnership as an ‘‘entity’’
rather than an ‘‘aggregate’’ solely for the
purposes of calculating the imputed
underpayment based on majority
ownership of the partnership (measured
by the partners’ interest in profits).
Specifically, the comment suggested
that if more than 50% of the interest in
a partnership’s profit is held by one or
more individuals, S corporations, or
closely-held corporations, the
provisions of the Code that apply to
individuals should apply for purposes
of determining the amount of any
imputed underpayment. This comment
was not adopted.
As discussed earlier in this section of
this preamble, section 6225 is
prescriptive as to how an imputed
underpayment is determined. The
determination process expressly does
not determine the imputed
underpayment as if the partnership
were an individual or an entity. Instead,
the process for determining the imputed
underpayment, including
‘‘appropriately netting all partnership
adjustments’’ under section
6225(b)(1)(A) in accordance with
§ 301.6225–1 generally does not take
into account partner tax attributes,
including whether a partner is an
individual or a person subject to the
Code provisions that apply to
individuals. The IRS has the discretion
to take into account an attribute of a
particular partner when grouping or
subgrouping the adjustments, but the
IRS is not required to do so. § 301.6225–
1(d)(1), (e)(1). For instance, the IRS may
consider whether a certain ownership
percentage of the partnership was held
by individuals, S corporations, or
closely-held corporations and group
adjustments based on information
submitted by the partnership. However,
a rule requiring the IRS to treat all
partnership adjustments as if they were
being taken into account by an
individual as the comment suggests is
inconsistent with the statutory
requirement to net items appropriately.
A rule that required the IRS to do so
would also potentially disadvantage
certain partnerships depending on the
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nature of adjustments and the types of
the partners.
Moreover, it is not clear that the
comment’s suggestion of accounting for
the individual tax attributes of specific
partners and applying the Code’s rules
regarding those partners would yield an
appropriate netting of the adjustments
for purposes of determining the imputed
underpayment at the partnership level.
For example, the Code’s rules may
apply differently to one individual
partner versus another individual
partner. Treating all individual partners
in the same manner would negate
operation of those rules. Accordingly,
there is no reason to conclude that
treating adjustments according to how
some but not all partners’ tax attributes
would affect an adjustment is any more
reasonable than not taking into account
any partners’ tax attributes. The statute
provides a baseline assumption that
partners’ tax attributes are not taken into
account. The imputed underpayment
that best reflects the facts and
circumstances of the partners should be
determined through application of the
permissive grouping and subgrouping
rules under § 301.6225–1(d)(1), (e)(1) or
through modification. Accordingly, the
final regulations do not adopt the
comment’s suggestion to base the
imputed underpayment determination
on the identity of the majority of the
partnership.
Section 6225(b) only provides specific
rules with respect to one type of
adjustment, that is, the rule that
adjustments to distributive shares of
partners not be netted under section
6225(b)(2). While it is true a
determination regarding an adjustment
described in section 6225(b)(2) is
usually made with some knowledge of
the partners’ distributive shares, such a
determination does not account for the
particular tax attributes of any specific
partner. The IRS is not required to know
any other information about the specific
partners at the initial examination phase
to reallocate adjustments between
partners. Therefore, in order to
effectuate the rule under section
6225(b)(2), there is no need to know
whether a partner is an individual, a
corporation, a pass-thru partner, or
some other entity. Section 6225(b)’s lack
of reference to any particular tax
attributes of specific partners indicates
that the determination of an imputed
underpayment is not dependent on
knowing any partner’s specific tax
attributes.
The same comment suggested another
alternative in which the grouping and
netting rules would account for current
year partner attributes for purposes of
determining an imputed underpayment.
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The comment cited the amendment to
section 6225(a) by TTCA that provides
if the partnership adjustments do not
result in an imputed underpayment,
such adjustments shall be taken into
account by the partnership in the
adjustment year. This comment was not
adopted.
Section 6225 does not reference either
partner tax attributes or current year
partners as a consideration in
determining the imputed
underpayment. As discussed earlier in
this section of this preamble, the
Treasury Department and the IRS have
determined a reasonable interpretation
of section 6225(b) supports a process in
which the determination of the imputed
underpayment does not depend on
specific partners’ tax attributes.
Moreover, the comment’s reference to
‘‘current year’’ is ambiguous; it could
refer to any number of different time
periods: the adjustment year, the actual
calendar year in which the imputed
underpayment is being determined, the
year the imputed underpayment is
proposed in a notice of proposed
partnership adjustment, the time during
the modification period prior to
issuance of the FPA, or, if the
partnership contests the partnership
adjustments in court, the year the court
decision is final. It is not administrable
for the IRS to determine an imputed
underpayment based on the potential
tax attributes from time periods that are
not fixed relative to the reviewed year
and that may result in different partners
being the relevant partners. The final
regulations reflect the amendments to
section 6225 by the TTCA, and therefore
the final regulations were not revised in
response to this comment.
v. Recharacterization Adjustments
One comment recommended that the
grouping and subgrouping rules be
reconsidered due to the concern that
under the proposed regulations, the
inability to net certain overpayments
and underpayments could lead to
taxpayers not receiving an appropriate
adjustment for taxes previously paid.
The comment cited to Example 4 under
proposed § 301.6225–1(h) to highlight
this concern. In Example 4, the IRS
determines that $125 of long-term
capital gain should have been reported
as $125 of ordinary income, resulting in
a $125 increase in ordinary income and
a corresponding $125 decrease in longterm capital gain (effectively, a $125
increase in long-term capital loss). The
increase in ordinary income results in
an imputed underpayment, and the
increase in long-term capital loss is an
adjustment that does not result in an
imputed underpayment.
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The comment noted that the example
does not specify what happens with
respect to the $125 increase in long-term
capital loss. As discussed earlier in
section 3.A.iii. of this preamble, the
example has been revised to clarify that
$125 increase in long-term capital loss
is taken into account in the adjustment
year in accordance with § 301.6225–3.
The comment also noted that it is
unknown whether the partnership will
be able to use the increased capital loss
in the future. To avoid this potential
adverse consequence, the comment
recommended that the regulations
permit a partnership to net adjustments
across different categories of gain or loss
to reflect taxes that were previously
paid. This comment was not adopted for
several reasons.
As an initial matter, implicit in the
comment’s suggestion is that either the
IRS or the partnership have knowledge
of taxes previously paid by the partners.
As discussed earlier in section 3.A.i. of
the preamble, facts and circumstances
unique to specific partners are generally
not taken into account in determining
whether the adjustments result in an
imputed underpayment. The regulations
give the IRS wide latitude to consider
such facts and circumstances, but the
rules do not narrowly define the
circumstances when that occurs. See
§ 301.6225–1(d)(1) and (e)(1). The
regulations are designed to maintain
flexibility for both the IRS and the
partnership to allow for the particular
examination to accommodate the
unique circumstances of each
examination. Based on these reasons
alone, the comment’s suggestion was
not adopted.
The comment’s suggestion was also
not adopted because it is inconsistent
with the overall approach applied to
how recharacterization adjustments are
taken into account in determining an
imputed underpayment. Proposed
§ 301.6225–1(c)(6)(iii) provided that a
recharacterization adjustment results in
at least two separate adjustments: One
adjustment reversing the improper
characterization of the partnershiprelated item, and the other adjustment
effectuating the proper characterization
of the partnership-related item.
Generally, one of those adjustments is a
positive adjustment and the other is a
negative adjustment, but each
adjustment is normally the same
numerical amount ($125 in the case of
Example 4 under proposed § 301.6225–
1(h)). Under proposed § 301.6225–
1(d)(3)(iv), the positive adjustment and
the negative adjustment are each placed
into its own separate subgrouping.
Because an adjustment in one
subgrouping may not be netted against
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6485
an adjustment from another
subgrouping, the positive adjustment is
not offset by the negative adjustment,
and the result is a net positive
adjustment that forms the base for an
imputed underpayment amount.
Proposed § 301.6225–1(e)(2) and (3)(i).
These rules are adopted largely
without change in the final regulations
in order to ensure that
recharacterization adjustments are not
inappropriately netted when
determining an imputed underpayment,
as required by section 6225(b)(1)(A).
Allowing for the netting of the negative
adjustment against the positive
adjustment in the case of a
recharacterization adjustment, as
suggested by the comment, could cause
the positive adjustment to be negated in
its entirety, which would defeat the
purpose of making the adjustment in the
first place. It would also result in the
recharacterization adjustment not
properly being reflected in the imputed
underpayment calculation. For instance,
allowing the capital loss to fully offset
the ordinary income in Example 3 under
§ 301.6225–1(h) would not adequately
reflect the fact that there was an
underreporting of ordinary income by
the partnership for that taxable year.
Furthermore, if there were no imputed
underpayment because
recharacterization adjustments were
allowed to net, there would be no
statutory basis for imposing an interest
charge on the partnership as suggested
by the comment.
Accordingly, the comment’s
suggestion to net adjustments across
different categories of gain or loss to
reflect taxes that were previously paid
was not adopted, though the effect of
such adjustments may be mitigated, in
whole or in part, under certain
circumstances through the modification
procedures or by making a push out
election under section 6226. The final
regulations under § 301.6225–1(e)(2) do
clarify, however, that positive
adjustments and negative adjustments
within the same subgrouping may only
net within that same subgrouping. No
netting is permitted across
subgroupings.
vi. Credits and Creditable Expenditures
In determining whether partnership
adjustments result in an imputed
underpayment, adjustments to credits
are placed in the credit grouping
described under § 301.6225–1(c)(3). One
comment suggested that for
administrative efficiency, it would make
sense to group and order credits in
accordance with Form 3800 and
recommended that the regulations
provide for grouping and ordering
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credits in such a manner. This comment
was not adopted.
As discussed earlier in section 3.A.ii.
of this preamble, the subgrouping rules
under § 301.6225–1(d)(3)(i), including
the application of those rules to the
credit grouping, take into account any
limitations or restrictions under the
Code. Therefore, to the degree the Code
would require certain credits to be
subgrouped within the credit grouping
to reflect any limitations or restrictions,
the rules under § 301.6225–1(d)(3)(i)
allow for that result. In addition, when
determining subgroupings the IRS may
take into account the facts and
circumstances of a partnership and its
partners. It may be the case that the
subgroupings with respect to a
particular set of adjustments ultimately
reflects the manner in which credits are
grouped and ordered on Form 3800, but
that may not always be the case. The
regulations provide the necessary
flexibility to achieve the result
suggested by the comment without
binding the IRS and partnerships to a
particular manner in which credits must
be subgrouped.
Additionally, because the Form 3800
and the underlying statutory rules it
reflects may change over time, it is
unwise to link the regulatory rules for
subgrouping with the form’s
methodology for grouping credits.
Relying on the general subgrouping
rules under § 301.6225–1(d)(3)(i) gives
the IRS and partnerships the flexibility
to adapt to changes in the Code and any
form changes without needing to amend
the regulations.
Adjustments to creditable
expenditures are placed in the
creditable expenditure grouping
described under § 301.6225–1(c)(4).
Proposed § 301.6225–1(c)(4)(B),
(d)(3)(iii), and (e)(3)(iii) provided
specific rules relating to foreign
creditable tax expenditures. Aside from
the general rule regarding what
constitutes a creditable expenditure, no
additional rules relating to creditable
expenditures were proposed.
The Treasury Department and the IRS
requested comments on the appropriate
treatment of creditable expenditures.
One comment suggested any items that
may be treated as a credit when taken
into account by a partner and not
otherwise limited (for instance, by their
non-creditable status against the
alternative minimum tax) be credited
against the imputed underpayment
amount. For other items which may be
subject to limitations at the individual
level, the comment suggested that the
regulations provide rules similar to
those rules proposed under proposed
§ 301.6225–3, regarding adjustments
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that do not result in an imputed
underpayment, because any adjustment
to a credit would not result in an
imputed underpayment.
With the exception of the rules under
§ 301.6225–1 regarding foreign tax
creditable expenditures, the Treasury
Department and the IRS have
determined not to issue regulations
regarding the treatment of creditable
expenditures at this time. However, the
final regulations do clarify that the
general subgrouping principles under
§ 301.6225–1(d)(3)(i) apply when
subgrouping adjustments to creditable
expenditures. The comments received
with respect to creditable expenditures
remain under consideration, and future
guidance will be issued when
appropriate. The final regulations also
clarify that a net positive adjustment to
creditable foreign tax expenditures is
excluded from the calculation of the
total netted partnership adjustment
under § 301.6225–1(b)(2).
Comments were also requested
regarding how credit recapture
situations should work under the
centralized partnership audit regime.
One comment offered suggestions with
respect to two credit recapture
situations. The first situation involved a
credit recapture that results from a
partnership adjustment. The comment
recommended in that situation that the
regulations should incorporate any
credit recapture into the calculation of
any imputed underpayment to the
extent that the originating credits were
generated from partnership activities,
but that this incorporation should be
limited to partnerships with partners
that actually would have benefited from
the original credits. This
recommendation was partially adopted.
A recapture of a credit generated by
partnership activities constitutes a
partnership adjustment as defined
under § 301.6241–1(a)(6), and the credit
recapture would constitute a positive
adjustment under § 301.6225–
1(d)(2)(iii)(A) and be placed in the
credit grouping under § 301.6225–
1(c)(3). The full amount of the credit
recapture would be taken into account
in the determination of the imputed
underpayment, unless the partnership
requests, subject to IRS approval, that
the credit recapture should be taken into
account differently during the
partnership-level proceeding or
pursuant to a modification request. See
§ 301.6225–1(d)(1), (e)(1), § 301.6225–2.
This rule is necessary because, as
discussed earlier in this section of this
preamble, in general, the initial
determination of an imputed
underpayment does not account for the
attributes of the partnership’s partners,
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including whether and to what extent
any partners actually benefited from the
original credits. Accordingly, the final
regulations include a credit recapture
amount in the amount of the imputed
underpayment, and this amount is not
limited to the amount partners actually
benefited from the recaptured credits
unless the partnership can affirmatively
demonstrate to the satisfaction of the
IRS during exam either before issuance
of the NOPPA or on modification the
appropriate partner-level tax treatment.
The second situation described by the
comment involves a partnership
adjustment that results in a credit that
is incorporated into the imputed
underpayment calculation, presumably
as a reduction to the imputed
underpayment and that may later be
subject to recapture. The comment
recommended that the regulations
require the partnership to notify
partners that they received the benefit of
such credits and that the partners may
be obligated to recapture those credits at
a later date. The comment suggested this
notice could be provided as notes to the
adjustment year Schedule K–1. This
comment was not adopted. The final
regulations do not require that the
partnership notify the partners of any
risk of future credit recapture, though
the partnership is not prohibited from
doing so if the partnership determines
that such notification would be
beneficial to the partners and the
partnership. Except where required for
the operation of the provisions of the
centralized partnership audit regime,
the Treasury Department and the IRS do
not generally regulate communications
between the partnership and the
partners, and therefore the final
regulations do not impose a requirement
for notification by the partnership
concerning possible credit recaptures.
Because a net negative adjustment to
a credit, that is, an increase in an item
of credit, would generally be subject to
limitations under the Code, the final
regulations under § 301.6225–1(e)(3)(ii)
clarify that a net negative adjustment to
a credit is treated as an adjustment that
does not result in an imputed
underpayment as described in
§ 301.6225–1(f)(1), unless the IRS
determines otherwise. This rule ensures
that the total netted partnership
adjustment is not inappropriately
reduced by an increase in credit that
would subject to limitations in the
hands of the partners of the partnership.
B. Modification of an Imputed
Underpayment
Proposed § 301.6225–2 provided the
rules and procedures regarding
modification of an imputed
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underpayment by the partnership. The
Treasury Department and the IRS
received multiple comments regarding
proposed § 301.6225–2 focusing on the
following areas: (1) Modification in
general; (2) timing of modification
requests and determinations; (3)
amended return modification; (4) the
alternative procedure to filing amended
returns; (5) rate modification; (6)
modification pertaining to certain
passive losses of publicly traded
partnerships; (7) modification
pertaining to qualified investment
entities; (8) closing agreement
modification; and (9) recommendations
to add additional types of modifications.
i. Comments Pertaining to Modification
in General
The modification provisions under
§ 301.6225–2 are designed to determine
an imputed underpayment amount that
reflects, as closely as possible, the tax
the partners would have paid had they
correctly reported the adjusted items,
while at the same time maintaining the
efficiencies of a streamlined
examination and collection process. See
JCS–1–16 at 65–66. One comment
suggested, that the modification
provisions do not operate as intended
because those provisions do not
expressly permit a modification to
reflect how the partners actually took an
item into account, to account for
reductions that would be permitted to
offset an increase under generally
applicable law, or to otherwise
expressly challenge the IRS’s method of
calculating a proposed adjustment
amount. Except as described later in this
section, no changes to the regulations
were made in response to this comment.
The Treasury Department and the IRS
do not agree with the comment’s
characterization of how the
modification provisions operate because
the modifications available under
§ 301.6225–2 permit a partnership to
achieve the results sought by the
comment. For instance, both the
amended return procedure and the
alternative procedure to filing amended
returns provide an opportunity for the
partnership to request modification to
reflect how an item was actually taken
into account by its partners and to
account for offsetting reductions
permitted under generally applicable
law. When a partner files an amended
return including his share of the
partnership adjustments, the amended
return reflects a tax amount based on
how the partner originally reported the
partnership-related item prior to
adjustment compared to how the
partnership adjustment affects the
partner’s original return. This tax
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amount is the correct amount of tax for
that partner after taking into account the
partnership adjustment and includes
any allowable reductions that may offset
any additional income determined at
the partnership level.
Regarding the comment’s concern that
a partnership does not have an
opportunity to challenge the IRS’s
method of calculating a proposed
adjustment amount, proposed
§ 301.6225–2(d)(6) provided a procedure
for modifying the composition of an
imputed underpayment. Under
§ 301.6225–2(d)(6), a partnership may
request that the IRS include one or more
partnership adjustments in a particular
grouping or subgrouping. If certain
negative partnership adjustments
should be treated as if no limitations or
restrictions in fact apply to the partners
to whom the adjustments are allocated
and the partnership can establish this
result, if approved, on modification,
such negative adjustments may be
properly grouped or subgrouped with
other adjustments and therefore allowed
to net against those adjustments in
accordance with § 301.6225–1(e) to
reduce the amount of the imputed
underpayment.
To the extent the comment was
suggesting that the modification
procedures do not provide the
partnership an opportunity to challenge
the substance of partnership
adjustments, the comment is correct but
no change is made in response to the
comment. The statutory modification
procedures are designed to allow the
partnership to modify the amount of the
imputed underpayment, not adjust the
substance of the partnership
adjustments that underlie the imputed
underpayment. The substance of
partnership adjustments are determined
by the IRS on examination, and may be
further revised in the IRS Appeals
Office (IRS Appeals) or by a court in a
proceeding for readjustment brought
under section 6234. Although the
comment did not explicitly state it as
such, to the extent the comment was
recommending a rule under § 301.6225–2
that allows a modification to reflect a
circumstance where a partner actually
took an item into account in a manner
consistent with how that item was
adjusted by the IRS during the
partnership proceeding, this suggestion
was adopted. As discussed later in
section 3.B.ix. of this preamble, the final
regulations under § 301.6225–2(d)(2)(ii)
allow a partnership to request
modification based on how adjusted
items were taken into account by a
partner prior to the item being adjusted
by the IRS.
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The same comment also suggested
that the modification procedures permit
a partnership to demonstrate how an
adjustment would impact its partners
and reduce an imputed underpayment
without a need for the partners to file an
amended return. The other proposed
modification procedures provided
multiple opportunities for partnerships
to demonstrate the impact of
adjustments on specific partners. The
alternative procedure to filing amended
returns is one way in which this type of
modification may be achieved. Under
§ 301.6225–2(d)(2)(x), a partnership may
submit on behalf of a partner, in
accordance with forms, instructions,
and other guidance prescribed 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
partner were filing an amended return.
If the partnership avails itself of this
procedure with respect to a partner, the
partner does not need to also file an
amended return in order for
modification to be approved. The
amended return procedures and the
alternative procedure to filing amended
returns are discussed further in sections
3.B.iii. and 3.B.iv. of this preamble.
Other modification procedures also
provide the partnership with an
opportunity to demonstrate the effect of
adjustments on specific partners. For
instance, tax-exempt modification
provides an opportunity for the
partnership to demonstrate that
partnership adjustments are allocable to
a partner that would not owe tax by
reason of its status as a tax-exempt
entity. Rate modification allows
partnerships to demonstrate that
partners would be subject to a lower rate
than the highest rate of tax applied to
calculate the imputed underpayment.
Because the partnership has many
avenues within modification to
demonstrate the effect a partnership
adjustment would have on specific
partners, no new modification
procedures were adopted in response to
this comment.
Former proposed § 301.6225–2
permitted a partnership to request
modification with respect to an indirect
partner (as defined in § 301.6241–
1(a)(4)). See, for example, former
proposed § 301.6225–2(d)(2). One
comment suggested that permitting
partnerships to modify their imputed
underpayment to account for direct and
indirect partners is consistent with the
objective of determining an imputed
underpayment amount that is as close as
possible to the tax due if the partnership
and partners had correctly reported and
paid. The comment further suggested
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that permitting modifications for direct
and indirect partners would also reduce
the disincentives for partnerships to pay
the imputed underpayment and
recommended the final regulations
adopt rules permitting modification
with respect to indirect partners,
consistent with the proposed
regulations.
The final regulations are consistent
with the comment’s request and adopt
the proposed rules allowing
modification with respect to indirect
partners, provided the indirect partner
is a relevant partner as defined in
§ 301.6225–2(a). The August 2018
NPRM introduced, the term ‘‘relevant
partner’’ to describe any person for
whom modification is requested by the
partnership that is a reviewed year
partner, including a pass-through
partner, or an indirect partner. The term
relevant partner does not include,
however, any person that is a whollyowned entity disregarded as separate
from its owner for Federal income tax
purposes. No comments were received
regarding the definition of relevant
partner. The final regulations maintain
the definition of relevant partner from
proposed § 301.6225–2(a).
Accordingly, under the final
regulations a partnership may request
modification with respect to reviewed
year partners (direct partners), including
pass-through partners, and indirect
partners. A partnership may not request
modification, however, with respect to a
direct or indirect partner that is a
wholly-owned entity disregarded as
separate from its owner for Federal
income tax purposes.
One comment noted some concerns
regarding the interaction between the
centralized partnership audit regime
and ERISA. The comment expressed
concerns about situations in which the
partnership representative must decide
whether to request a modification that
benefits non-ERISA partners over ERISA
partners and how that affects the
discharge of any fiduciary duties under
ERISA. To address these concerns, the
comment made three recommendations.
First, the comment recommended that
the regulations provide that the
partnership representative may solicit a
vote of the partners in the partnership
in determining whether to request a
modification. This recommendation was
not adopted.
The decision whether to solicit a vote
of the partners in the partnership as part
of determining whether to request
modification or a particular type of
modification is fully within the
authority of the partnership
representative. Nothing in the final
regulations prevents or requires the
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solicitation of a vote by the partnership
representative. Additionally, if the
partnership and its partners impose
such a condition on the partnership
representative through an agreement
with the partnership representative, any
failure to adhere to that agreement does
not affect actions taken by the
partnership representative. See
§ 301.6223–2(d).
Second, the comment recommended
that the IRS agree to automatically grant
a request for an extension of the 270-day
period for requesting modification if a
vote of the partners whether to request
modification has been solicited. This
comment was not adopted for the
reasons discussed in section 3.B.ii. of
this preamble.
Lastly, the comment recommended
that the Treasury Department and the
IRS share a suggestion with the
Department of Labor that the
Department of Labor clarify that a
partnership representative will not be
treated as a fiduciary with respect to any
ERISA plan partner if the partnership
representative requests or fails to
request a modification based on the
results of a vote of the partners. The
rules regarding who is treated as a
fiduciary with respect to any ERISA
plan are beyond the scope of these
regulations. However, as requested, the
comment has been forwarded to the
Department of Labor.
Another comment recommended that
the IRS revise proposed § 301.6225–
2(c)(2)(ii) to limit the required
information submitted with any
modification request to that specific
information relevant to the type of
modification requested. The comment
noted that requiring extensive and
detailed documentation for each
modification request will limit the
ability of some partnerships to take
advantage of the modification
procedure. The comment also urged the
IRS to establish realistic minimal
documentation requirements for any
modification request and create
additional specific relevant
requirements for the various types of
modification requests permitted under
the proposed regulations. The comment
further noted that the ability of the IRS
to request supplemental information
prior to approval (as provided in
proposed § 301.6225–2(c)(4)) will
ensure that the IRS obtains
documentation they deem necessary for
a particular set of facts and
circumstances. This comment was
adopted.
The final regulations under
§ 301.6225–2(c)(2)(ii) clarify that the
partnership representative must furnish
to the IRS information as required by
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forms, instructions, or other guidance
prescribed by the IRS or as is otherwise
requested by the IRS. The final
regulations provide examples of such
information, including the information
that was described previously in
proposed § 301.6225–2(c)(ii). The
information listed in the proposed
regulations pertained to items that are
necessary to process the majority of
modification requests. It is possible,
however, that certain items may not be
necessary in every case, and if such
items are not necessary, or if different
items are more appropriate, the IRS will
describe the information required in
forms, instructions, or other guidance.
In this way, the regulations provide the
flexibility for the IRS to request what is
needed for efficient and effective
processing of modification requests,
while maintaining the flexibility to
adapt information requests in the future.
The final regulations under
§ 301.6225–2(c)(2)(i) also clarify that,
pursuant to section 6241(10), the
partnership may be required to submit
or file items required to be provided to
the IRS under § 301.6225–2 in an
electronic format. The form and manner
for submission of anything required to
be submitted under § 301.6225–2 will be
described in forms, instructions, and
other guidance prescribed by the IRS.
Lastly, the final regulations under
§ 301.6225–2(c)(2)(i) clarify that the IRS
will deny modification not only for the
failure to substantiate a modification
request but also for the failure to pay
anything required under § 301.6225–2.
ii. Timing of Modification
Proposed § 301.6225–2(c)(3) provided
rules regarding the time for submitting
modification information to the IRS.
One comment made three
recommendations regarding these rules.
First, the comment suggested that the
final regulations provide a specified
time frame in which the IRS must
respond to a request for modification.
This suggestion was not adopted
because the regulations under section
6235 provide a time frame within which
the IRS will respond to a partnership’s
modification request.
Pursuant to § 301.6235–1(a)(2) and
(b), in the case of any modification of an
imputed underpayment, no partnership
adjustment may be made later than the
date that is 270 days after the date on
which everything required to be
submitted under § 301.6225–2 for
modification is so submitted. The date
on which everything required to be
submitted is so submitted is the date the
modification period ends or expires.
§ 301.6235–1(b)(2). Accordingly, in the
case of a modification request, the IRS
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must generally mail an FPA to make a
partnership adjustment within 270 days
of the date the modification period
ends.
To the extent the comment was
requesting a deadline by which the IRS
must respond to a request for
modification prior to the time limit for
making adjustments under section 6235,
the comment was not adopted. It is not
administrable for the IRS to impose a
deadline that would apply in every case
that is earlier than the statutory
deadline imposed by section 6235. The
facts and circumstances of each
administrative proceeding, the
partnership adjustments made during
that proceeding, and the modifications
that are requested may differ greatly.
Similarly, the complexity of the
modification process may range from
simple and straight forward to highly
complex. Finally, for those modification
requests that are more complex or that
require additional documentation, the
partnership may extend the time period
for submitting modifications under
§ 301.6225–2(c)(3) to allow for
additional time and any additional
documentation. For the reasons
discussed in section 3.B.iii. of this
preamble, the IRS plans to adopt
procedures under which the IRS will
respond to a request for modification in
the FPA, including the planned time
frame for responses. It is important to
tax administration that these procedures
are developed in separate guidance to
allow for additional flexibility as the
IRS gains more experience with the
centralized partnership audit regime
and the modification process. The 270day period for mailing an FPA therefore
acts as the outside time frame within
which the IRS must respond to a request
for modification. Because this time
frame exists elsewhere in the
regulations, the final regulations under
§ 301.6225–2 do not provide a separate
time frame for providing a response to
a modification request.
The comment also recommended that
the final regulations provide that if there
is a pending request for modification at
the expiration of the 270-day period, the
IRS will automatically agree to an
extension of that period until at least 30
days after they provide their response.
It is not clear from the face of the
comment which 270-day period the
comment was referring to—the 270-day
period under § 301.6225–2(c)(3)(i) in
which everything required for
modification must be submitted or the
270-day period under § 301.6235–1(b) in
which the IRS must mail an FPA to
make a partnership adjustment. Both
periods may be extended at the request
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of the partnership or the IRS. See
§§ 301.6225–2(c)(3)(ii); 301.6235–1(d).
Regardless of which 270-day period
the comment was referring to, the
comment was not adopted. The final
regulations do not provide that the IRS
will automatically agree to an extension
of either period under any
circumstance. Whether an extension of
the time to submit modification
information, or an extension of the time
to consider such information, is
warranted is based on the facts and
circumstances. In some cases an
extension may be appropriate, for
example, where there is a pending
request and additional information
would help clarify the issues. In other
cases an extension may not be
appropriate, for example, where it is
clear that more information is likely to
be of little to no value. Accordingly,
while the regulations allow for an
extension of both the period to submit
modification information and the period
in which the IRS has to consider such
information, neither extension is
automatic but rather must be based on
the facts and circumstances of the
particular case.
Lastly, the comment suggested the
regulations provide a time frame for a
partnership to respond to an IRS request
for additional information during the
IRS’s review of a modification request.
The comment recommended the time
frame for responding be a minimum of
60 days and suggested that this issue is
particularly significant if the request
occurs near the expiration of the 270day period. This comment was not
adopted, but the IRS plans to adopt
procedures that will allow a partnership
time to provide additional information,
when necessary, with respect to a
particular request for modification.
Because not all modification requests
will require additional information from
the partnership, this time frame is not
provided for in the regulations. In
addition, the response time may depend
on the facts and circumstances. For
example, as the comment notes, if a
request for additional information
occurs near the end of the 270-day
period to submit information, there
might not enough time to allow for a 60day response period. While it is true the
partnership and the IRS may agree to
extend the 270-day period, this will not
always be the case. Accordingly, a rule
establishing a 60-day time frame for
responding to requests for additional
information in every case is not
appropriate and would, in the example
noted in the comment, serve as an
automatic extension of the 270-day
period to submit information that might
not be requested by the partnership or
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consented to by the IRS. Nevertheless, if
more information is required from the
partnership, the IRS appreciates the
need for partnerships to know when
that information is due. The IRS plans
to establish appropriate procedures
through forms, instructions, or other
guidance. As a result, the regulations
were not revised in response to this
comment.
iii. Amended Returns
Proposed § 301.6225–2(d)(2) provided
rules regarding modification with
respect to amended returns filed by
partners. Proposed § 301.6225–2(d)(2)(i)
provided that a partnership may request
modification of an imputed
underpayment based on an amended
return filed by a relevant partner
provided all of the partnership
adjustments properly allocable to such
relevant partner are taken into account.
One comment recommended that the
regulations clarify whether modification
will be allowed if a partner files an
amended return taking into account
adjustments that make up one imputed
underpayment, while not taking into
account adjustments that make up a
separate imputed underpayment which
also affects that partner. This comment
was not adopted because its
recommendation contradicts the statute.
The requirement in proposed
§ 301.6225–2(d)(2)(i) that partners take
into account all partnership adjustments
derives from section 6225(c)(2)(A)(ii).
Section 6225(c)(2)(A)(ii) states that
when partners file amended returns in
modification, that return must ‘‘take
into account all adjustments’’ under
section 6225(a) that are ‘‘properly
allocable to such partners (and the effect
of such adjustments on any tax
attributes).’’ Section 6225(a) refers to
‘‘any adjustment by the Secretary to any
partnership-related items with respect
to any reviewed year of a partnership
. . .’’ Section 6225(c)(2)(A)(ii)’s
reference to ‘‘all adjustments’’ under
section 6225(a) does not distinguish
between partnership adjustments that
result in an imputed underpayment and
partnership adjustments that do not
result in an imputed underpayment. By
not distinguishing between the types of
partnership adjustments, the language of
section 6225(c)(2)(A)(ii) indicates that
all partnership adjustments must be
taken into account by partners filing
modification amended returns, as
opposed to only those adjustments that
are associated with the imputed
underpayment for which modification is
requested. Consistent with section
6225(c)(2)(A)(ii), the final regulations
under § 301.6225–2(d)(2)(i) require that
even in the case of multiple imputed
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underpayments, partners filing
modification amended returns must take
into account all partnership
adjustments, not just the adjustments
associated the imputed underpayment
for which modification is requested.
The comment also asked whether
there are any specific requirements or
limitations that apply in the case of an
amended return modification request
made with respect to one imputed
underpayment, but not with respect to
a separate imputed underpayment.
Nothing in the regulations imposes
specific requirements or limitations on
the partnership or its partners when
utilizing amended return modification
with respect to only one imputed
underpayment. The partnership and its
partners must comply with all the
requirements under § 301.6225–2(d)(2)
with respect to any request for amended
return modification, including a request
made for only one imputed
underpayment in the case of multiple
imputed underpayments.
Proposed § 301.6225–2(d)(2)(ii)(A)
provided that an amended return
modification request will not be
approved unless the 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 at
the time such return is filed with the
IRS. One comment suggested that the
full payment requirement under
§ 301.6225–2(d)(2)(ii)(A) should be
satisfied if the partner is in compliance
with available IRS administrative
processes to make full payment, for
example, an installment payment
agreement. Another comment
recommended that the regulations
permit partners to submit requests for
installment agreements or offers in
compromise within the 270-day
modification period. These comments
were not adopted.
Section 6225(c)(2)(A)(iii) provides
that if one or more partners file
amended returns during modification,
such returns take into account the
adjustments properly allocable to such
partners, and ‘‘payment of any tax due
is included with such returns,’’ the
imputed underpayment is determined
without regard to the adjustments so
taken into account. Payment of any tax
due is a statutory requirement under
section 6225(c)(2)(A)(iii). Consistent
with section 6225(c)(2)(A)(iii), proposed
§ 301.6225–2(d)(2)(ii)(A) required full
payment of any tax, penalties, and
interest due at the time the amended
return is filed with the IRS. If payment
is not included with the amended
return, the IRS will not approve
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modification with respect to the
amended return.
This rule is necessary to ensure that
the IRS collects the entire amount of tax
that results from the partner’s share of
partnership adjustments before
approving the partnership’s request that
the imputed underpayment be
calculated without regard to those
adjustments. Allowing a partner to enter
into an installment agreement
undermines the ability of the IRS to
collect tax on those adjustments both
from the partnership, because the
adjustments would no longer be
reflected in the imputed underpayment,
and from the partner that may
ultimately default on the installment
agreement. If a partner ultimately does
not pay, the IRS may not be able to
collect against that partner and likely
would be outside the time period within
which it must make partnership
adjustments, preventing the IRS from
collecting any additional imputed
underpayment from the partnership.
Similar concerns are presented by
allowing a partner to enter into an offer
in compromise. Moreover, a rule
permitting partners to request
installment agreements and offers in
compromise as alternatives to full
payment would increase the
administrative burden on the IRS by
requiring the IRS to evaluate whether
such requests were appropriate, slowing
down the modification process in
general, and complicating the amended
return process specifically. Accordingly,
the final regulations retain the rule that
full payment of any tax, penalties, and
interest due as a result of taking into
account the partner’s allocable share of
adjustments is required in order for
modification to be approved with
respect to a partner’s amended return. In
addition, the final regulations under
§ 301.6225–2(c)(2)(i) clarify that a
failure by any person to make any
payments required with respect to a
modification request within the time
restrictions described in § 301.6225–2(c)
will result in a denial of a modification
request.
Proposed § 301.6225–2(c)(3) provided
that all information required under
§ 301.6225–2 with respect to a request
for modification must be submitted on
or before 270 days after the date the
NOPPA is mailed, unless that period is
extended with the permission of the
IRS. Several comments recommended
partners only be required to file
amended returns or make payments on
those returns after the issuance of the
FPA to allow the court to review the
partnership adjustments before
modification is requested. One comment
recommended that, to provide an
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adequate amount of time, partners
should be allowed at least 270 days
from the time of the receipt of an FPA
to file amended returns. The comment
further recommended that the 270-day
period be tolled at any time during
which a court proceeding pursuant to
section 6234 is ongoing. Another
comment recommended that the final
regulations commit the IRS to freely
grant extensions of the 270-day period
and other relevant periods and allow
taxpayers to seek modification of the
underpayment by filing an amended
return, or use the alternative procedure
to filing amended returns, within 60
days after there has been a final
determination in the partnership case.
These comments were not adopted.
First, allowing modification requests,
including amended returns, after the
FPA is mailed or after there is a court
decision with respect to the partnership
adjustments is contrary to the statutory
scheme under section 6225(c). The
statutory scheme under section 6225,
section 6231, and section 6235 envision
a process where the IRS first mails a
NOPPA to the partnership that includes
the proposed partnership adjustments
and proposed imputed underpayment,
followed by a modification period,
which is followed by the FPA. The
mailing of the NOPPA starts the 270 day
period within which anything required
to be filed or submitted in the
modification process must be filed or
submitted to the IRS. After the close of
this 270-day period, which may be
extended with the consent of the IRS, if
modification is requested, the IRS has
an additional 270 days to modify the
imputed underpayment as necessary to
reflect approved modifications and mail
the FPA, which will describe the final
partnership adjustments and imputed
underpayment. After the FPA is issued,
there is no basis for the IRS to consider
further modifications. The examination
is complete and the partnership may
then pay the imputed underpayment or
elect the push out. The partnership may
also challenge the partnership
adjustments in court.
Section 6225(c)(2), which provides
the procedures for filing amended
returns and the alternative procedure to
filing amended returns was enacted at
the same time as section 6225(c)(7). The
amended return modification and the
alternative procedure to filing amended
returns are just two of many statutory
modifications. Had Congress intended
for there to be an exception to the 270day period under section 6225(c)(7) for
amended return modification, as
suggested by the comments, Congress
could have included such an exception
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when enacting both statutory
provisions.
Second, extending the 270-day period
beyond the date of the issuance of the
FPA could result in several tax
administration issues for the IRS.
Section 6225(c)(8) provides that any
modification of the imputed
underpayment amount ‘‘shall be made
only upon approval of such
modification by the Secretary.’’ A
request for amended return modification
must therefore be approved by the IRS.
If the partnership fails to comply with
the requirements under the rules under
§ 301.6225–2, the IRS may decline to
approve the request for modification. In
order to adopt the comment’s suggestion
that amended returns and associated
payments not be provided until after the
FPA is issued, the IRS would need to
wait to approve the modification request
with respect to that amended return
until after the partnership and its
partners submitted what was required to
be provided under the modification
rules. This would prevent the IRS from
including its approval or disapproval of
the modification request in the FPA,
delaying a determination with respect to
the modification until some later date.
The FPA—the notice of final
partnership adjustment—is designed to
be the final notice to the partnership
from IRS, not an interim notice subject
to further modifications or changes.
A partnership adjustment is defined
under section 6241(2) as an adjustment
to a partnership-related item, and a
partnership-related item is defined as
including an imputed underpayment.
An adjustment to an imputed
underpayment is, therefore, a
partnership adjustment as defined in
section 6241(2). The approval of a
modification affects the amount of an
adjustment that is taken into account in
the imputed underpayment under the
rules described in § 301.6225–2(b).
Therefore, the IRS must approve or
disapprove of a modification before the
expiration of the time period for making
adjustments under section 6235 or the
IRS will have lost its opportunity to do
so. Relatedly, and in addition to the
concern about the statute of limitations,
if the IRS waits until after the issuance
of the FPA to make further adjustments
to the imputed underpayment,
modification could extend for an
indefinite period of time, which would
lead to uncertainty and administrative
challenges for the partnership, the
partners, and the IRS. This is
particularly true with respect any
adjustments after the mailing of the FPA
because the mailing of the FPA imbues
the partnership with certain rights, such
as the right to petition a court for a
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readjustment of the partnership
adjustments in the FPA and to elect the
push out under section 6226 with
respect to the imputed underpayment.
The comment does not explain how a
rule that would allow the IRS to further
alter the imputed underpayment after
the partnership has elected push out or
petitioned a court for a readjustment
would work. Such a rule would raise
numerous tax administration concerns
and potentially cause confusion for the
partnership and its partners as to what
the IRS finally determined and when.
In addition, the IRS is limited as to
when it may make a partnership
adjustment. According to section
6235(a)(2), ‘‘no adjustment under this
subchapter for any partnership taxable
year may be made after . . . in the case
of any modification of an imputed
underpayment under section 6225(c),
the date that is 270 days [including
extensions] . . . after the date on which
everything required to be submitted to
the Secretary pursuant to such section is
so submitted.’’ In order to adopt the
comment allowing an extension of the
270-day modification submission period
beyond the issuance of the FPA, the IRS
would be required to issue two FPAs.
The first FPA would address the
partnership adjustments and the
imputed underpayment prior to
consideration of modifications. The
second FPA would be issued at some
later date before the expiration of the
period for making adjustments under
section 6235. Nothing in section
6235(a)(2) prevents the IRS from mailing
a second FPA; however, under section
6231(c), if the partnership petitions the
original FPA under section 6234, the
Secretary may not mail another notice
with respect to the same taxable year in
the absence of fraud, malfeasance, or
misrepresentation of a material fact. In
other words, in the situation
contemplated by the comment, in which
a partnership petitioned the FPA, in
general, the IRS could not issue a
second FPA to approve or deny
modification issues because the IRS
would be prevented from doing so
under section 6231(c).
Adopting the comment’s suggestion
would prevent the IRS from exercising
the discretion to approve modification
for which Congress provided it
authority in section 6225(c)(8). The IRS
needs this discretion to ensure that
requests for modification are
appropriate for the partnership and that
the administrative proceeding process is
uniform between partnerships. Partners
also have other options, such as
subsequent amended returns, to address
some concerns regarding making
payments during the modification
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process. Accordingly, the regulations
have not adopted this comments
suggestion.
Proposed § 301.6225–2(d)(2)(vii)(B)
provided that if a relevant partner files
an amended return for purposes of
modification, such partner may not file
a subsequent amended return without
the permission of the IRS. One comment
recommended that the regulations
clarify that the restriction in proposed
§ 301.6225–2(d)(2)(vii)(B) relates to only
those items related to a partnership
adjustment. Similarly, another comment
recommended that the IRS ease the
restriction on the ability of a taxpayer
using the amended return modification
procedure to file subsequent amended
returns when the subsequent amended
return does not affect the items included
in the partnership’s audit adjustments.
The comment stated that requiring a
taxpayer to request permission from the
IRS before filing an amended return is
an administrative burden in terms of
time and resources for both the taxpayer
and the IRS.
Another comment recommended that
the regulations not prohibit a partner
who has amended her return as part of
the modification process from amending
her return again without the permission
of the Service. This comment suggested
revising the forms for filing amended
returns to (1) include a check-box asking
whether the taxpayer filed a prior
amended return for that same tax year
that was the basis for a modification
under section 6225(c) and (2) require
any taxpayer who answers in the
affirmative to attach to the subsequent
amended return an explanatory
statement and certain related
documents, such as the prior amended
return. Another comment recommended
the regulations clarify that if a partner
filed an amended return and paid tax on
its share of adjustments, and
modification was approved with respect
to the amended return, the partner may
later claim a refund of the tax paid if the
partnership successfully appeals or
contests the adjustment.
The final regulations clarify that the
restriction under § 301.6225–
2(d)(2)(vii)(B) only applies to
subsequent amended returns that
change the treatment of partnership
adjustments previously taken into
account on a prior amended return that
was filed during modification or are
filed with respect to an imputed
underpayment that was taken into
account on a prior modification
amended return. The final regulations
also removed the requirement that
limited further amended returns filed
with respect to an imputed
underpayment. The final regulations
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provide exceptions to this rule if the
modification amended return or all
modifications become inapplicable to
the reviewed year. For instance, a court
could determine after the issuance of
the FPA that the IRS’s determination
was erroneous in whole or in part, and
there was no longer an imputed
underpayment or the imputed
underpayment should be reduced. In
that case, the amended returns
submitted during modification would
have been with respect to an imputed
underpayment that either no longer
existed or was altered. The
modifications in that case would either
be wholly or partially inapplicable.
Alternatively, during the modification
process, after a partner files an amended
return for purposes of modification, the
IRS could deny modification under
§ 301.6225–2(c)(2)(i). In those cases, the
partner may file a subsequent amended
return to reverse the treatment of
partnership adjustments taken into
account as part of the request for
modification that is no longer
applicable, subject to the period of
limitations under section 6511. In
response to the comment, the final
regulations also remove the requirement
that the partners request permission
before filing subsequent amended
returns. The final regulations also
clarify that the restrictions on amended
returns also apply to other claims for
refund.
One comment recommended
clarification about whether and how the
partner can file a request for refund if
the IRS denies a modification based on
a partner’s filing of an amended return
and payment of tax (or the use of the
alternative procedure to filing amended
returns) or if the partnership files a
petition in court of the FPA which
results in an adjustment in the
partnership’s favor. The same comment
requested clarification on how a
taxpayer who has filed an amended
return or executed a closing agreement
under section 6225 would receive the
benefit of the reduced tax liability of the
revised adjustment amount. Pursuant to
section 7121, a closing agreement
approved by the IRS is final and
conclusive. Accordingly, as a general
rule, a partner may not request a refund
of amounts agreed to in, and paid with,
a closing agreement, though the
determination of whether a partner
could file further amended returns or
claims for refund with respect to a year
in which a closing agreement was
executed would depend on the facts and
circumstances and the agreed upon
terms of the closing agreement. As
discussed earlier in this Summary of
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Comments and Explanation of
Revisions, the final regulations under
§ 301.6225–2(d)(2)(vii) now clarify that
partners may file additional amended
returns with respect to partnership
adjustments or imputed underpayments,
including in the case of denied
modification or court readjustment. To
file a subsequent amended return, the
partners must do so in accordance with
forms, instructions, and other guidance
prescribed by the IRS. A partner that
modifies using the alternative procedure
to filing amended returns as described
in section 6225(c)(2)(B) that seeks a
refund for an amount paid as part of
those procedures must follow the rules
of § 301.6225–2(d)(2)(vii)(B) and (C).
There is no separate process for partners
that modify using the alternative
procedure to amended returns.
Former proposed § 301.6225–
2(d)(2)(vii) provided that a pass-through
partner may elect, solely for the
purposes of modification, to take into
account its share of the partnership
adjustments and make a payment on
behalf of its partners. If modification
was approved with respect to the passthrough partner, the partnership was not
permitted to request modification based
on amended returns filed by upper-tier
direct and indirect partners of the passthrough partner. Former proposed
§ 301.6225–2(d)(2)(vii). One comment
suggested that the regulations should
permit a modification of a pass-through
partner’s payment amount based on
amended returns filed by its upper-tier
owners.
This suggestion was adopted in the
August 2018 NPRM revisions to
§ 301.6225–2(d)(2). Proposed
§ 301.6225–2(d)(2)(vi)(B), as revised in
the August 2018 NPRM, provided that
in accordance with forms, instructions,
and other guidance, a pass-through
partner making a payment under
§ 301.6225–2(d)(2)(vi)(A) may take into
account modifications with respect to
its direct and indirect partners to the
extent that such modifications are
requested by the partnership and
approved by the IRS. Therefore, to the
extent an upper-tier partner of the passthrough partner has filed an amended
return, the partnership has requested
modification with respect to that
amended return, and the modification is
provided, the pass-through partner may
take into account that amended return
in accordance with forms, instructions,
or other guidance when making a
payment in modification. The final
regulations under § 301.6225–
2(d)(2)(vi)(B) retain this rule.
Another comment recommended that
the regulations provide more guidance
regarding the form required for an
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amended return filed by a pass-through
partner and the information that form
will need to contain. This comment was
not adopted. The form required for any
amended return, including an amended
return filed by a pass-through partner,
and the information required on that
form will be set forth in forms,
instructions, and other guidance
prescribed by the IRS. Setting forth this
information in forms, instructions, and
other guidance gives the IRS the
flexibility to adapt the form and its
contents without having to amend the
regulations. This flexibility preserves
government resources and expedites the
time in which taxpayers will know of
changes to the statement requirements.
At the same time, the IRS recognizes the
need of taxpayers to know of the
information required in order to comply
with the regulations. The IRS plans to
develop and release drafts of forms and
instructions for public inspection as
they are completed.
Another comment recommended that
the regulations address the situation in
which a partner files an amended return
but incorrectly calculates the interest
amount due and subsequently receives
an additional assessment from the IRS.
The comment expressed concern that
the incorrect calculation of interest and
resulting shortfall in payment may
result in an inadvertent denial of the
modification request. Another comment
recommended a rule that a de minimis
shortfall of interest or penalties
resulting from a good faith effort by a
taxpayer to calculate the correct amount
shall not result in a denial of a
modification request.
The comment recommending a good
faith de minimis rule to address
situations in which a partner has a
shortfall of interest or penalties was not
adopted. First, allowing a good faith de
minimis rule for interest or penalties is
inconsistent with the centralized
partnership audit regime’s approach of
allowing modification of the imputed
underpayment if partners fully account
for adjustments by taking them into
account, paying any resulting amounts
due as if the partnership and partners
had reported correctly the first time.
Because amended return modification is
occurring years after any tax would have
been due as a result of the partnership
adjustment, partners with an
underpayment must pay interest to
compensate the government for the time
value of money on the underpayments.
Similarly, partners that owe a penalty
must pay that penalty to fully take into
account the adjustments and allow the
partnership the benefit of modification
for those adjustments. A de minimis
rule that affirmatively blessed some
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dollar amount or percentage shortfall for
either interest or penalties would
encourage taxpayers to calculate their
interest and penalties to fall within the
allowed de minimis range to avoid
disallowance but pay less than is
required. It is inconsistent with the
collection of amounts determined due
on examination to systematically allow
a collection of less than all that is due.
Second, administering a rule that
allowed partners to underpay what is
owed under § 301.6225–2(d)(2)(ii)(A) as
long as they made a good faith effort and
had only a de minimis short fall would
result in untenable administrative
complexities for the IRS. The IRS must
review all modification requests within
270 days after the modification request
has been submitted. The IRS will need
to quickly ensure that all relevant
partners have provided all information
and payments necessary to approve
modification. A rule that includes a
good faith element would require the
IRS to engage in a partner-specific
inquiry with respect to any shortfall that
might be within the de minimis range to
determine whether partner made a good
faith effort to comply. A rule that looks
to the intent of the partner in
determining the amount of interest and
penalties is factually intense and would
require an inquiry into the state of mind
of the partner or that partner’s tax
advisor. In a fraction of the time it
would take to make such an inquiry, the
IRS could instead request and receive
full payment from the partner.
Therefore, it is not administrable to
inject this additional, burdensome good
faith de minimis shortfall rule in the
final regulations, when the current
requirement of full pay is both more
administrable and less burdensome on
the IRS and partners.
If the partnership representative
becomes aware of the shortfall before
expiration of the 270-day period, the
partnership representative may request
an extension of the 270-day period in
order to allow for full payment to be
made before the modification period
ends. In this way, the partnership
representative can take steps to ensure
that all requirements under § 301.6225–
2(d)(2) were satisfied.
Proposed § 301.6225–2(d)(2)(ii)(C)
provided that in the case of a
reallocation adjustment, all partners
affected by such adjustment must file
amended returns in order for the IRS to
approve modification with respect to
those amended returns. One comment
suggested that the partners affected by
the reallocation adjustment should be
required to file amended returns only if
there is evidence of a net underpayment
of tax by the partners as a whole. The
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comment suggested as an alternative
that the partners be allowed to attach an
explanation or information statement to
their adjustment year return rather than
filing an amended return for the
reviewed year. These suggestions were
not adopted.
Section 6225(c)(2)(C) provides that in
the case of a reallocation adjustment,
amended return modification applies
only if all the requirements of either
amended return modification or the
alternative procedure to filing amended
returns ‘‘are satisfied with respect to all
partners affected by such adjustment.’’
The statute does not provide any
exception to this rule, including an
exception for situations in which there
is evidence of a net underpayment of
tax. Accordingly, the final regulations
retain the rule that all partners affected
by a reallocation adjustment must file
amended returns or utilize the
alternative to filing amended returns in
order for modification to be approved.
This rule ensures that all relevant
partners affected by the reallocation
adjustment take into account their
appropriate shares of that adjustment
and thereby ensures such partners
receive the appropriate tax benefits for
the taxable year subject to the
adjustment.
Furthermore, payment and collection
of an underpayment is not the only
issue required to be resolved by the
filing of modification amended returns.
In some cases, the purpose of the
amended returns is to take into account
the tax attributes that may have effects
on other modification years. Certainly,
in some cases, the tax effect of
adjustments taken into account in one
year may be offset by tax effect of
adjustments in another year or by
another partner, but as described in
section 3.A. of this preamble, the
unmodified imputed underpayment is
designed by statute to take into account
only the reviewed year and it does not
take into account the specific tax
attributes of any partner or the effects of
the partnership adjustments in
modification years or intervening years.
An unmodified imputed underpayment
will often result in an amount that is
higher than what the partners
collectively would have paid had they
taken the adjustments into account
properly in the reviewed year. The
unmodified imputed underpayment
protects the IRS’s interests in collecting
at least the amount of tax that should
have been paid by the partners without
having to separately examine and track
all the partners. In other words, the
unmodified imputed underpayment
represents a simple way to allow the
partnership to pay, and the IRS to
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6493
collect, as amount related to the
partnership adjustments without having
to delve into the specific tax attributes
of each partner.
Modification, however, provides an
opportunity for the partners and the
partnership to demonstrate that specific
tax attributes of partners should have an
effect on the imputed underpayment.
With respect to reallocation
adjustments, if partners seek to receive
the benefit of modification, each
partners subject to a reallocation
adjustment must follow the statutory
requirement to file amended returns for
all adjustments in a reallocation
adjustment. It may be the case that one
partner pays on modification and
another partner is entitled to a refund.
However, such a result is unknown
until the partners demonstrate that fact
through modification. More
importantly, section 6225(c)(2)(C)
expressly requires that all partners have
taken into account all partnership
adjustments and related tax attributes
for the modification years and future
years. This statutory mandate makes
clear that the purpose of this
modification is not to ensure that there
is a net tax payment with respect to the
partnership adjustments, but instead to
ensure that the proper partners have
taken the adjustments into account
correctly, including in all modification
years. The requirement that all partners
affected by a reallocation file amended
returns is a necessary condition for
modification to be approved.
Similarly, the comment’s suggestion
that partners attach a statement to their
adjustment year returns attesting to the
fact that they had a net underpayment
as a result of the adjustments is not
workable. In an administrative
proceeding, the adjustment year is the
year in which the FPA is mailed under
section 6231 or, if the partnership
challenges the adjustments in court, the
year such decision becomes final.
Section 6225(d)(2). If a partner was one
of the partners subject to a reallocation
adjustment and failed to file an
amended return, none of the other
amended returns from other partners
subject to the reallocation adjustments
could be approved as a modification. As
a result, the imputed underpayment
would be determined in the FPA
without reduction with respect to those
adjustments. Attaching a statement on
the next filed return of the partner that
failed to file an amended return would
have no effect on the imputed
underpayment already finally
determined.
Recognizing the costs and burdens
this rule may create for partnerships,
partners, and the IRS in cases where it
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is clear one partner will not owe tax on
its share of a reallocation adjustment,
the Treasury Department and the IRS
included a rule within proposed
§ 301.6225–2(d)(2)(ii)(C) to mitigate the
potential impact of the requirement that
all partners file amended returns.
Proposed § 301.6225–2(d)(2)(ii)(C)
provided that modification may be
approved in the case of a reallocation
adjustment even if a relevant partner
affected by the adjustment does not file
an amended return or utilize the
alternative procedure provided the
partner takes into account its share of
the adjustment through other
modifications approved by the IRS or if
a pass-through partner takes into
account the relevant adjustments. 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 § 301.6225–
2(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. Proposed
§ 301.6225–2(d)(2)(ii)(C).
One comment recommended that the
regulations clarify whether a tax-exempt
partner eligible for tax-exempt
modification under § 301.6225–2(d)(3)
and allocated a share of a reallocation
adjustment must file an amended return
to satisfy the requirements under
§ 301.6225–2(d)(2) in order for the IRS
to approve a modification request with
respect to such partner. The comment
recommended adding to the regulations
either an explicit statement or an
example indicating that such a filing is
not necessary provided the IRS is
satisfied that the relevant partner
qualifies as a tax-exempt entity. This
comment was partially adopted by
adding a sentence to § 301.6225–
2(d)(2)(ii)(C) indicating the IRS may
determine the amended return
requirement in the context of
reallocation adjustment is satisfied to
the extent an affected relevant partner
meets the requirements of § 301.6225–
2(d)(3) regarding tax-exempt partners.
The satisfaction of the requirements of
§ 301.6225–2(d)(2) (amended return
modification and the alternative
procedure) is only satisfied to the extent
of the tax-exempt portion as defined in
§ 301.6225–2(d)(3)(iii). Therefore, if
certain partnership adjustments
allocable to tax-exempt partners are
subject to tax, and the partner wishes to
take advantage of amended return
modification, the tax-exempt partner
may have to file an amended return to
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pay tax on the portion of adjustments
allocable to that partner which are
subject to tax. The final regulations do
not add an example to this effect
because the plain language of
§ 301.6225–2(d)(2)(ii)(C) addresses the
point raised by the comment.
One comment recommended that the
regulations provide an additional
modification method in the case of
reallocation adjustments that would
allow a partner to whom a net negative
adjustment is allocated to file an
amended return (or use the alternative
procedure to filing amended returns) to
claim a refund of tax arising from such
adjustment, on the condition that the
partner to whom the net positive
adjustment is allocated, or the
partnership, has paid the tax
attributable to the net positive
adjustment. Similarly, another comment
recommended that the regulations
permit a modification of an imputed
underpayment where only the partner
experiencing additional income (or less
deduction, loss, or credit) as a result of
a reallocation adjustment files an
amended return. These comments were
not adopted.
As discussed earlier in this section of
this preamble, section 6225(c)(2)(C)
provides that in the case of a
reallocation adjustment, amended
return modification applies only if all
the requirements of either amended
return modification or the alternative
procedure to filing amended returns
‘‘are satisfied with respect to all partners
affected by such adjustment.’’ This rule
demonstrates that reallocation
adjustments made by the IRS under the
centralized partnership audit regime are
included in the calculation of the
imputed underpayment unless all
partners affected by such adjustments
take them into account. Section
6225(c)(2)(C) does not contain an
exception to the rule that all partners
take the adjustments into account.
Consistent with section 6225(c)(2)(C)’s
requirement that all affected partners
take the reallocation adjustments into
account, the IRS has exercised its
discretionary authority under section
6225(c)(6) to permit modification in the
case of a reallocation adjustment where
a relevant partner affected by such
adjustment has met the requirements of
another modification method and that
modification has been approved by the
IRS. This regulatory exception fits
squarely within the statutory framework
of ensuring that all partners affected by
a partnership adjustment take into
account their share of that adjustment
and recognize the tax effects of such
adjustments. Adopting the approach
suggested by the comments, one where
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either only the loss partner or only the
income partner take the adjustments
into account, would undercut the
statutory framework and directly
contradict the plain language of the
statute. A rule that does not account for
all aspects of a reallocation adjustment
would run contrary to the collection
mechanism of the centralized
partnership audit regime with respect to
reallocation adjustments. The statutory
framework requires either that the
partnership pay an imputed
underpayment representing the
additional tax effects of the reallocation
adjustment in the adjustment year and
take the negative adjustment aspects
into account in that same year or all
affected partners from the reviewed year
must fully account for their share of the
reallocation adjustment.
One comment recommended that the
regulations clarify whether a taxpayer
filing an amended return or requesting
a closing agreement under section 6225
for purposes of modification is required
to take into account and pay any
additional taxes due under chapters 2
and 2A of the Code. This comment was
adopted. The final regulations clarify
that a partner filing an amended return
or using the alternative procedure to
filing amended returns only is required
to pay tax due under chapter 1 of the
Code with respect to the amended
return and the alternative procedure to
filing amended returns. The exception
to the limitation of tax to chapter 1 tax
is for a pass-through partner filing an
amended return under § 301.6225–
2(d)(2)(vi) because the pass-through
partner, but for § 301.6225–2(d)(2)(vi),
might otherwise not owe tax under
chapter 1. Nothing in the final
regulations limits the IRS’s authority
under section 6241(9). The type of tax
paid in a closing agreement, however,
will depend on the terms of the closing
agreement. The final regulations clarify
the type of tax paid in these situations
in §§ 301.6225–2(d)(2)(ii)(A) and (d)(8).
Another comment asked about the
effect on the IRS’s approval of
modification in the case that a
partnership or partner fails to pay taxes
under chapters 2 and 2A in
modification. Because the final
regulations clarify that a partner is only
required to pay chapter 1 tax in
amended return modification or in the
alternative procedure to filing amended
returns, the failure to pay taxes under
chapters 2 and 2A is irrelevant to the
approval or denial of modification. The
questions asked by the comment are
therefore moot, and no changes were
made in response to the comment.
Section 6225(c)(2)(D) provides that
section 6501 and 6511 shall not apply
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with respect to returns filed in
modification. A comment was
concerned that amended returns filed
after the expiration of the time period in
section 6511 would be automatically
rejected by IRS Service Centers, causing
confusion and uncertainty about
whether the amended return has, in fact
been filed, and if so, whether it was
timely. The comment recommended
that the IRS develop a procedure for the
filing of amended returns with the IRS
personnel handling the partnership’s
examination so that this person can
make sure that the return is filed and
properly processed or alternatively that
the regulations directed taxpayers to
include a banner on the top of the
amended return stating, in red ink,
‘‘Filed Pursuant to Section 6225(c),’’ to
alert the Service Center that this
amended return should not be
automatically rejected if it is otherwise
untimely under section 6511. Another
comment recommended that the final
regulations also require that the
reviewed-year partner include in the
affidavit filed with the amended return
modification request the partner’s TIN
and contact information to enable the
IRS to locate easily the amended return
and payment in its databases. The IRS
intends to develop a process through
which the partners would file their
amended returns, but the regulations do
not specify the details of that process.
The IRS will develop forms and
instructions directing the partnership
and the partners as to how and where
to file their amended returns submitted
in modification, and the IRS intends to
request the relevant partner’s TIN as
part of that process.
Prior to the enactment of the TTCA,
section 6225(c)(2) stated that section
6511 did not apply with respect to
amended return modification, but it was
silent on whether section 6501
limitations on assessment applied. If a
partner’s period under section 6501 was
closed at the time of modification, the
partner might not be able to participate
in amended return modification. One
comment recommended that the IRS
resolve this issue by allowing partners
to extend the relevant section 6501
periods. This comment was received in
response to the June 2017 NPRM, prior
to the enactment of the TTCA. The
TTCA explicitly provided that section
6501 does not apply with respect to
returns filed in modification, so the
need for such extensions no longer
exists.
iv. The Alternative Procedure To Filing
Amended Returns
The TTCA created an additional
statutory modification under section
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6225(c)(2)(B), titled the alternative
procedure to filing amended returns (the
alternative procedure), which has been
referred to as the ‘‘pull in’’ or ‘‘push in.’’
Several comments recommended that
the Treasury Department and the IRS
adopt these procedures in response to
the June 2017 NPRM, prior to the
enactment of the TTCA. The August
2018 NPRM proposed rules related to
the alternative procedure, adopting
those comments in response to the
enactment of the TTCA, which included
the alternative procedure.
One comment suggested that the final
regulations should include a
modification procedure whereby an
imputed underpayment is reduced
when the partnership provides
sufficient evidence that the adjustments
underlying the imputed underpayment
would have resulted in a smaller
imputed underpayment if they had been
taken into account according to how the
partners and the partnership actually
treated the partnership-related item. The
comment described this concept as
similar to the ‘‘pull-in’’ procedure
included in the TTCA. The comment
has not been adopted in its entirety
because no one modification provision
specifically allows the partnership to
demonstrate that the imputed
underpayment would be reduced if the
partnership and partners had taken the
adjustment into account. The purpose of
the modification process is not only to
reduce the amount of the imputed
underpayment, but for those partners
that take the adjustments into account
as part of the modification requested,
they are required to pay any additional
tax, interest and penalties due and agree
to adjust their tax attributes in exchange
for the IRS approving the modification.
As such, the regulations contain rules
related to the alternative procedure as
defined in section 6225(c)(2)(B) and
§ 301.6225–2(d)(2)(x) and under that
procedure the partnership may satisfy
the requirements of amended return
modification by submitting on behalf of
relevant partners, in accordance with
forms, instructions, and other guidance
prescribed 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 a modification amended return.
The partnership must also demonstrate
that relevant partners have agreed to
take into account tax attributes
consistent with taking into account the
partnership adjustments allocable to
that partner. The regulations provide
another modification under § 301.6225–
2(d)(10), where the IRS will consider
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6495
any other request for modification and
determine whether it is appropriate in
the circumstances.
Another comment recommended that
the modifying partner using the ‘‘push
in’’ procedure deal directly with the IRS
exam team during the partnership audit
because many partners will not want to
provide the details of their financial
affairs to the partnership representative
or the partnership. The regulations do
not provide specific details as to what
information will need to be provided to
the IRS under the alternative procedure,
but the IRS intends to develop such
processes. The partnership, not the
partners, however, requests amended
return modification, and the partnership
may satisfy those requirements through
the alternative procedure. Because the
partnership is responsible for making
the modification request, the comment
was not adopted at this time. The
processes the IRS develops may
ultimately provide that the partners
submit some information directly to the
IRS, but the partners will likely be
required to provide some information to
the partnership representative to request
modification. Nothing in the regulations
prevents the partnership from working
with third parties or selecting a
partnership representative that will not
share the details of the partners’
financial affairs directly with the
partnership. The partnership, the
partnership representative, and the
partners will ultimately be required to
meet filing requirements established in
forms, instructions, and other guidance.
The same comment also
recommended that partners who
establish that they are owed a refund
receive such refund through the
alternative procedure rather than by
filing an amended return or relying on
§ 301.6225–3, which allows an
adjustment that does not result in an
imputed underpayment to be taken into
account in the adjustment year. The
comment recommended that refunds in
the alternative procedure context only
be allowed after all relevant partners
have paid their tax and after the
partnership has paid any remaining
imputed underpayment. This comment
was not adopted. Requests for the
alternative procedure under § 301.6225–
2(d)(2)(x) are not claims for refunds for
the reasons described later in this
section of this preamble. To the extent
the comment was suggesting that
refunds could be claimed after the
issuance of the FPA, which is the point
after which the partnership would have
been able to pay the imputed
underpayment, the partners may only
do so pursuant to § 301.6225–
2(d)(2)(vii).
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One comment recommended that if
partnerships and their partners will be
permitted some simplified method of
modification (without the need to file
amended returns), the regulations
should fully explain that concept. This
comment was made prior to the passage
of the TTCA and the issuance of the
August 2018 NPRM. The preamble to
the August 2018 NPRM explains the
alternative procedure as enacted by the
TTCA. This section of the preamble to
these regulations provides additional
explanation of the alternative
procedure. In addition to the
regulations, the alternative procedure
will be further described in forms,
instructions and other guidance as the
IRS processes surrounding the
alternative procedure are developed
further.
Another comment requested
clarification on the interaction of the
alternative procedure with other
provisions described in the proposed
regulations. For instance, the comment
stated the language under proposed
§ 301.6225–2(d)(2)(x) was unclear
whether a taxpayer reporting a negative
reallocation or recharacterization
adjustment is eligible to use the
alternative procedure. No changes were
made to the regulations in response to
this comment.
There is nothing in the regulations
that precludes the partnership from
requesting modification with respect to
a relevant partner under the alternative
procedure where the relevant partner
would otherwise be entitled to a refund
had the partner instead filed amended
returns. However, the regulations state
that a request for modification under the
alternative procedure is not a claim for
refund with respect to any person. As a
result, a relevant partner may not make
a claim for refund via the alternative
procedure. This rule is based on the
statutory requirement under section
6225(c)(2)(B)(i) that requires a partner to
pay any amount due under section
6225(c)(2)(A)(iii) if the partnership
requests the alternative procedure. If a
partner, after taking into account all
partnership adjustments allocable to the
partner, would not owe any amount as
required in amended return
modification under section
6225(c)(2)(A)(iii), the partner is not
required to make a payment as part of
the alternative procedure. The fact that
a partner may utilize the alternative
procedure without making a payment
does not, however, allow the partner
access to a refund through the
alternative procedure.
The alternative procedure as
described in section 6225(c)(2)(B) does
not provide that the partners may obtain
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refunds. The alternative procedure
provides a streamlined process for
partners and the partnership generally
to those partners paying additional
amounts of tax, in lieu of filing
amended returns. This streamlined
nature of the alternative procedure
process also benefits the IRS. By
limiting the alternative procedure to just
those relevant partners that are making
payments required under section
6225(c)(2)(B)(i) (or that owe no
additional tax), the IRS should be able
to more quickly and efficiently process
requests under the alternative
procedure. Partners that have been
allocated negative adjustments,
including reallocation or
recharacterization adjustments, may
take those adjustments into account
using the alternative procedure but by
doing so will forego any claim for
refund of any amounts related to taking
those adjustments into account. In other
words, if, for instance, the partner had
offsetting income against which the
negative adjustment might be netted, the
partner could utilize the alternative
procedure to make whatever payment
resulted from the remaining offsetting
income. If the partner would be entitled
to a refund as a result of its allocated
adjustments, the partner must use the
amended return procedures to obtain
that refund. Using the amended return
procedures allows the IRS to track the
refund appropriately and ensure it is
processed efficiently.
The same comment also stated that it
was unclear if the alternative procedure
would trigger the restrictions on further
amended returns described in
§ 301.6225–2(d)(2)(vii)(B). The final
regulations under § 301.6225–
2(d)(2)(vii)(B) clarify that the
restrictions on subsequent amended
returns or claims for refund apply
equally to the amended return process
and the alternative procedure. A
subsequent amended return or claim for
refund is most likely to occur outside
the centralized partnership audit regime
process. Because the alternative
procedure does not exist outside the
centralized partnership audit regime,
there is no method by which a
partnership could use the alternative
procedure to obtain a refund of amounts
paid during modification. The partner
may file a subsequent amended return,
however, if the circumstances described
in § 301.6225–2(d)(2)(vii)(C) are met.
v. Rate Modification
Under § 301.6225–2(d)(4), a
partnership may request modification
based on a lower rate of tax for the
reviewed year with respect to
adjustments that are allocable to a
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relevant partner that is a C corporation
and adjustments with respect to capital
gains or qualified dividends that are
allocable to a relevant partner who is an
individual. One comment suggested that
the rate modification procedures
accommodate situations in which the
sole adjustment is a recharacterization
of capital gain as ordinary income. In
that situation, the adjustment increasing
ordinary income is a net positive
adjustment that results in an imputed
underpayment, and the adjustment
decreasing capital gain is a net negative
adjustment that does not result in an
imputed underpayment. See
§ 301.6225–1.
The comment recommended revising
the rate modification procedures to
provide that an individual partner may
file an amended return, or use the
alternative procedure, to establish that
the partner previously paid tax on the
recharacterized gain at the lower rate
with the result that the portion of the
net positive adjustment allocable to
such partner would be subject to tax
only at the difference between the
highest tax rate and such lower rate. In
addition, the comment recommended
that the rate modification procedures
allow a corporate partner to demonstrate
that it paid tax on capital gain with the
result that the portion of the net positive
adjustment allocable to the corporate
partner would be subject to tax at a zero
percent rate, as corporate tax rates on
capital gains equal rates on ordinary
income.
Rate modification is designed to
address situations in which there is an
adjustment to a particular type of
income that is allocable to an individual
or an adjustment that is allocated to a
corporate taxpayer. A partnership may
demonstrate that a lower rate of tax
applies with respect to that income type
or based on the type of taxpayer. Section
6225(c)(4)(A) (flush language) limits the
rates that may apply by providing that
‘‘[i]n no event shall the lower rate
determined . . . be less than the highest
rate in effect with respect to the income
and taxpayer . . . .’’ Proposed
§ 301.6225–2(d)(4) provided a rule
consistent with this statutory mandate.
For instance, with respect to an
adjustment 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. The comment suggested
a rule where the rate applied to the
recharacterized income allocable to the
C corporation would be 0 percent
because there is no reduced capital
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gains rate for C corporations. Zero is
lower than the highest rate applicable to
a C corporation and as a result is not
permitted by statute. Similarly, for the
individual in the comment’s suggestion,
for taxable year 2018 the highest rate is
37 percent and the highest rate for
capital gains is 20 percent. The
difference between these two rates is 17
percent, which is lower than the highest
rate for capital gains for an individual
and as a result not permitted by statute.
Accordingly, the comment was not
adopted.
In contrast, the amended return (or
the alternative procedure to filing
amended returns) allows a partner to
take into account the partner’s share of
adjusted items and apply the specific
tax rate that applies to the partner’s
amount of taxable income. When taking
into account her share of the
adjustments, which includes both the
adjustment increasing ordinary income
and the adjustment decreasing capital
gain, the partner is able to offset
additional partnership income with any
permissible deductions. For example, a
partner may utilize the increase in
capital loss to offset the capital gain that
was originally reported and
subsequently recharacterized, thereby
reducing the partner’s tax on capital
gains to potentially zero and paying tax
on her share of ordinary income at the
partner’s specific effective tax rate.
To the extent the comment was
suggesting that the Treasury Department
and IRS exercise its discretionary
authority under section 6225(c)(6), the
Treasury Department and IRS decline to
do so because adopting such a rule
would present administrability concerns
for the IRS. For example, the corporate
partner described by the comment may
or may not have paid tax on capital gain
on the corporate partner’s original
return; there may have been offsetting
capital losses. The most efficient way
from a tax administration perspective
for the partnership and the corporate
partner to demonstrate that the
corporate partner previously paid tax on
the capital gain is the amended return
process (or the alternative procedure).
By filing an amended return, the
corporate partner can take into account
the adjusted amount of both ordinary
income and capital loss, and assuming
those adjustments could offset on the
corporate return, the corporate partner
would owe no additional tax and the
adjustments taken into account by the
corporate partner would be disregarded
from the total netted partnership
adjustment. See § 301.6225–2(b)(2). An
amended return, or an alternative
procedure submission, allows the IRS to
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understand better what the corporation
took into account on its original return.
Proposed § 301.6225–2(b)(3) provided
rules for calculating an imputed
underpayment in the case of a rate
modification. The first step in
determining an imputed underpayment
in the case of a rate modification is to
determine each relevant partner’s
distributive share of the partnership
adjustments based on how each
adjustment subject to rate modification
would be properly allocated under
section 702 to such relevant partner in
the reviewed year. Proposed
§ 301.6225–2(b)(3)(iii)(A). In the case of
an adjusted item that was specially
allocated to a partner or group of
partners, however, each relevant
partner’s distributive share is
determined based on the amount of net
gain or loss to the partner that would
have resulted if the partnership had sold
all of its assets at their fair market value
as of the close of the reviewed year.
Proposed § 301.6225–2(b)(3)(iv).
One comment suggested that the
requirement to determine the partner’s
distributive share based on a
hypothetical sale of all partnership
assets at fair market value as of the close
of the reviewed year is administratively
burdensome and difficult for
partnerships to apply many years after
the calculation date. The comment also
suggested that the lack of a definition
for fair market value in the statute and
in the regulations will generate
significant disputes between the IRS
and partnerships. In order to simplify
the administration of this rule, the
comment recommended that the
regulations should define fair market
value solely for purposes of this rule as
a more easily determined amount, such
as using section 704(b) basis. This
comment was not adopted, although the
final regulations do provide an
alternative method for determining a
partner’s distributive share in the case
of special allocations as described later
in this section of this preamble.
Section 6225(c)(4)(B)(ii) provides if an
imputed underpayment is attributable to
the adjustment of more than one item,
and any partner’s distributive share of
such items is not the same with respect
to all such items, then the portion of the
imputed underpayment to which the
lower rate applies with respect to such
partner shall be determined by reference
to the amount which would have been
the partner’s distributive share of net
gain or loss if the partnership had sold
all of its assets at their fair market value
as of the close of the reviewed year of
the partnership. As discussed later in
this section of this Summary of
Comments and Explanation of
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6497
Revisions, the IRS recognizes that there
may be concerns about the burden a fair
market value analysis might create on
both the partnership and the IRS. The
Treasury Department and the IRS
considered using the authority under
section 6225(c)(6) to expand
modification to use section 704(b) basis,
but the recommendation to use section
704(b) basis is also flawed. Not all
partnerships have section 704(b) basis
numbers to which the partnership and
the IRS could refer for modification
purposes. Accordingly, the section
704(b) basis alternative would only be
available to certain partnerships, and
the IRS would prefer to provide an
alternative option to the fair market
value analysis that would be available to
all partnerships. In addition, there is
concern that some partners may not
have accurate records for section 704(b)
basis. As discussed later in this section
of the preamble, the Treasury
Department and the IRS did exercise the
authority under section 6225(c)(6) to
provide an option for special allocation
rate modification that would apply to all
partnerships.
The comment suggested, as an
alternative to defining fair market value,
that the regulations permit the
partnership to request that adjustments
subject to the special allocation rule
under § 301.6225–2(b)(3)(iv) be placed
in a specific imputed underpayment
separate from other adjustments. The
comment suggested this process would
allow for the adjustments to be allocated
solely to the affected relevant partners
in the appropriate manner, and also
recommended that the request to
designate a specific imputed
underpayment in this context be
considered separately from other
modification requests.
The process suggested by the
comment was arguably permissible
under former proposed § 301.6225–
2(d)(6). Under former proposed
§ 301.6225–2(d)(6), a partnership was
permitted to request during
modification that one or more
partnership adjustments taken into
account to calculate one general or
specific imputed underpayment be
taken into account to calculate a
different specific imputed
underpayment. Former proposed
§ 301.6225–1(e)(2)(iii) had defined a
specific imputed underpayment as an
imputed underpayment with respect to
adjustments to an item or items that
were allocated to one partner or a group
of partners that had the same or similar
characteristics or that participated in the
same or similar transaction. In the case
of a special allocation to a group of
partners, however, the partners may not
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necessarily share the same
characteristics or have participated in
the same transaction. Accordingly under
former proposed § 301.6225–1(e)(2)(iii),
certain specially allocated items may
have been eligible for placement in a
specific imputed underpayment while
others may not.
This discrepancy was addressed by
the revisions to proposed § 301.6225–
1(g)(2)(iii) in the August 2018 NPRM.
Proposed § 301.6225–1(g)(2)(iii)
provided that the IRS may designate a
specific imputed underpayment with
respect to adjustments to items that
were allocated to a partner or group of
partners that had the same or similar
characteristics, that participated in the
same or similar transaction, ‘‘or on such
other basis as the IRS determines
properly reflects the facts and
circumstances.’’ A partnership may
request designation of a specific
imputed underpayment during the
examination or during modification. See
§ 301.6225–2(d)(6). Accordingly,
because the process suggested by the
comment is contemplated by the
proposed regulations, no change was
made in the final regulations to
response to this comment.
With respect to the comment’s request
for an alternative to fair market value,
the Treasury Department and the IRS
recognize that a determination of fair
market value may present challenges for
taxpayers and the IRS. For instance,
obtaining a fair market value analysis
may require the hiring of experts by the
taxpayer, thereby increasing the costs of
modification. Depending on the type of
assets or the amount at issue, the IRS
may need to employ its own experts to
ensure that the taxpayer’s analysis is
correct. Recognizing these costs and
administrative burdens, the Treasury
Department and the IRS have exercised
the authority under section 6225(c)(6) to
‘‘provide for additional procedures to
modify imputed underpayment amounts
on the basis of such other factors as the
Secretary determines are necessary or
appropriate’’ to carry out the purposes
of section 6225(c). Pursuant to that
authority, the final regulations under
§ 301.6225–2(b)(3)(iv) allow a
partnership requesting rate
modifications in the case of special
allocations to determine the distributive
share for all adjustments to which the
lower rate applies with respect to all
partners based on the test under either
section 6225(c)(4)(B)(i) or section
6225(c)(4)(B)(ii).
The rule under the final regulations
allows partnerships and partners to
request modification based on what they
determine is the most appropriate
method to measure partners’
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distributive shares. This rule provides
an alternative to the fair market value
analysis for partnerships and partners
which comments suggested, and the
Treasury Department and the IRS agree,
may be too difficult or costly. The rule,
however, does not remove the ability of
a partnership to request modification
based on section 6225(c)(4)(B)(ii). The
final regulations also clarify that the
distributive share referenced in section
6225(c)(4)(B)(i) is the distributive share
as determined in the NOPPA, and if no
determination regarding that
distributive share was made in the
NOPPA, the rules of subchapter K of
chapter 1 of the Code (subchapter K).
The same comment also
recommended that the regulations
clarify that if the IRS requires a
partnership to make the deemed sale
calculation envisioned in proposed
§ 301.6225–2(b)(3)(iv), the regulations
provide that such action is not
considered a revaluation for purposes of
section 704. This comment was
adopted. A sentence has been added to
the final regulations under § 301.6225–
2(b)(3)(iv) to make clear that any
calculation by the partnership that is
necessary for purposes of complying
with the rule under § 301.6225–
2(b)(3)(iv) is not a revaluation for
purposes of section 704.
vi. Certain Passive Losses of Publicly
Traded Partnerships
Proposed § 301.6225–2(d)(5) provided
rules for modification regarding certain
passive activity losses of publicly traded
partnerships. Pursuant to proposed
§ 301.6225–2(d)(5), in the case of a
publicly traded partnership that is a
relevant partner, an imputed
underpayment is determined without
regard to the portion of any adjustment
the partnership demonstrates would be
reduced by a specified passive activity
loss which is allocable to a ‘‘specified
partner.’’ Proposed § 301.6225–
2(d)(5)(iii) defined specified partner as a
person that is a partner of a publicly
traded partnership; that is an
individual, estate, trust, closely held C
corporation, or personal service
corporation; and that has a specific
passive activity loss with respect to the
publicly traded partnership. One
comment recommended that the
definition of specified partner include
partnerships to accommodate persons
that hold an indirect interest in a lowertier partnership that is under
examination through one or more
upper-tier partnerships. The final
regulations do not adopt this definition
of specified partner, but the final
regulations do accommodate persons
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that hold an indirect interest in the
partnership under examination.
In the August 2018 NPRM, the
Treasury Department and the IRS used
the authority under section 6225(c)(6) to
create a second type of partner, a
qualified relevant partner, that was
eligible for modification under
§ 301.6225–2(d)(5). A qualified relevant
partner is a relevant partner that meets
the requirements of a specified partner
for each year starting with the first
affected year through the last year for
which a return was filed by the
partnership. To address the
recommendation made by the comment
to accommodate indirect partners, the
final regulations provide that an indirect
partner may also be a qualified relevant
partner, and therefore be eligible for
modification under § 301.6225–2(d)(5),
if the indirect partner is an individual,
estate, trust, closely held C corporation,
or personal service corporation and has
a specified passive activity loss with
respect to the publicly traded
partnership.
Former proposed § 301.6225–2(d)(5)
had provided that modification for
certain passive losses of publicly traded
partnerships applied equally with
respect to a publicly traded partnership
subject to a proceeding under the
centralized partnership audit regime
and where a portion of the imputed
underpayment was attributable to a
publicly traded partnership that is a
partnership-partner. Proposed
§ 301.6225–2(d)(5) was revised in the
August 2018 NPRM to provide that
§ 301.6225–2(d)(5) applies in the case of
a publicly traded partnership that is a
relevant partner. The final regulations
provide that modification under
§ 301.6225–2(d)(5) applies only to the
publicly traded partnership requesting
modification under § 301.6225–2 (that
is, the partnership under examination).
This change makes the modification
procedures under § 301.6225–2(d)(5)
more administrable for the IRS because
only the partnership under examination
may request modification under
§ 301.6225–2(d)(5). In this way, the
change also makes modification
§ 301.6225–2(d)(5) consistent with other
types of modification. Because the final
regulations accommodate certain
indirect partners of the publicly traded
partnership requesting modification,
this change should not substantially
affect the number of publicly traded
partnerships and partners eligible for
modification under § 301.6225–2(d)(5).
Another comment observed that
section 6225(c)(5) required certain
actions and calculations based on
information that would not be known
until the adjustment year. Pursuant to
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section 6225(d), the adjustment year in
the case of an administrative proceeding
is the year in which a case is fully
adjudicated under section 6234, or if no
petition is filed under section 6234,
when the FPA is mailed. A modification
request must be submitted within 270
days of the issuance of the NOPPA,
which must be mailed before the FPA.
See section 6231(b)(2)(A). As a result of
these rules, section 6225(c)(5) does not
operate properly in the case of an
administrative proceeding. When the
partnership submits modification under
section 6225(c)(5), the partnership
cannot know what the adjustment year
is, much less what tax effects there
might be in that year. The only
circumstance in which section
6225(c)(5) operates properly with
respect to the adjustment year is if an
AAR has been issued. This is because
under section 6225(d) the adjustment
year in the case of an AAR is the year
in which the AAR is filed.
To address these incongruences, the
comment recommended that the
regulations allow a publicly traded
partnership to reduce an imputed
underpayment based on a net decrease
in the passive activity loss allocable to
a specified partner in the reviewed year
to the extent the partnership takes such
loss into account in the taxable year
immediately preceding the year in
which the NOPPA is issued. This
comment was not adopted, but the
concerns it raises were addressed in the
August 2018 NPRM. In the August 2018
NPRM, the Treasury Department and
the IRS used the authority under section
6225(c)(6) to provide that the
partnership may request modification
under § 301.6225–2(d)(5) with respect to
the adjustment year or the most recent
year for which the publicly traded
partnership has filed a return under
section 6031.
The Treasury Department and the IRS
acknowledge that the most recent year
for which a return was filed may not
always be the year immediately before
the issuance of the NOPPA, as in the
rule suggested by the comment.
However, using the taxable year for the
most recently filed return allows the
publicly traded partnership to refer to
whatever return is the most recently
filed, even if that return was filed
shortly after the issuance of the NOPPA.
This flexibility allows the partnership to
take into account the information
known as of the most recent tax year. If
the rule were to require the publicly
traded partnership to take into account
information from a return filed before
the issuance of the NOPPA, as suggested
by the comment, the return filed before
the issuance of the NOPPA might not be
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the most recent return. For example, the
return filed prior to the issuance of the
NOPPA could have preceded the
NOPPA by several months. After the
NOPPA was issued and at the time the
partnership is considering submitting a
modification request, the partnership
could have filed the next year’s return
reflecting the next year’s passive activity
losses, which might differ from the
losses reported on the return filed prior
to the issuance of the NOPPA. The
Treasury Department and the IRS have
an interest in ensuring that the most
current tax amounts are used in
determining whether a modification
request under § 301.6225–2(d)(5) should
be approved. Given this interest, the
rule in the final regulations uses the
most recently filed return, rather than
the comment’s suggestion to use the
return filed before the issuance of the
NOPPA.
In addition, the rule suggested by the
comment would require the partnership
to know what adjustments would be
included in the NOPPA and make
adjustments on its return to take such
adjustments into account, prior to the
issuance of the NOPPA. If the
adjustments in the NOPPA somehow
differed from the adjustments the
partnership took into account on its
return, the modification might be
denied because the partnership failed to
take those adjustments into account.
The comment’s suggestion, therefore,
has its own timing issues. The final
regulations provide more flexibility for
the partnership to reflect the
information known as of the last return
filed without requiring the partnership
to predict what may or may not be in
the NOPPA and on which day the
NOPPA will be issued. Accordingly,
although the final regulations did not
adopt the comment per se, the final
regulations adopted an alternative
solution to the problem identified by the
comment.
The same comment recommended
that the final regulations allow a
publicly traded partnership to request
modification of the imputed
underpayment after the end of the
adjustment year. Specifically, the
comment recommended that the final
regulations require the modification
request to be submitted within 74 days
of the end of the adjustment year, which
roughly aligns with the original due
date of the partnership tax return. The
procedure recommended by the
comment is not administrable for the
IRS for the same reasons discussed
earlier in section 3.B.iii. regarding
accepting amended return payments
after the issuance of the FPA. Because
the FPA is the mechanism through
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which modification is approved or
denied, the modification determination
must be made prior to the issuance of
the FPA.
The comment stated that any postFPA modification request would cause
the FPA and a denial of the
modification request to be subject to
judicial review separately. This
statement is inaccurate. If the
partnership seeks judicial review under
section 6234 with respect to an FPA, in
the absence of a showing of fraud,
malfeasance, or misrepresentation of a
material fact, the IRS is precluded from
mailing another FPA to such
partnership with respect to such taxable
year. Section 6231(c). Accordingly, if
the IRS issued an FPA within the time
frames discussed earlier in section
3.B.iii. regarding amended return
payments, and the partnership seeks
judicial review of that FPA, the IRS
would be prevented from issuing a later
FPA dealing with the modification
request. If the partnership submitted its
modification request after the
partnership had already received
judicial review with respect to the
adjustments in the FPA, the IRS
generally could not mail an additional
FPA approving or denying the
modification request, and the
partnership would have no
determination concerning its
modification request which it could
challenge in court under section 6234.
Accordingly, this comment was not
adopted.
The same comment requested that the
IRS include the denial of any
modification request in the FPA to
ensure that any Tax Court proceeding
will also address the dispute regarding
the requested modification. This
comment was not adopted. Whether and
how disputes regarding modification
requests are subject to judicial review by
a court is not within the purview of the
Treasury Department’s or the IRS’s
regulatory authority. However, to assist
with any potential judicial review of
modification, the IRS plans to use the
FPA as the method for approving or
denying modification. The final
regulations do not specify, however,
what is required to be included in the
FPA for purposes of approving or
denying modification. The absence of a
regulatory rule in this regard provides
the IRS flexibility to allow for the
differing circumstances of each
administrative proceeding and varying
types of modification requests.
The final regulations in § 301.6225–
2(d)(5) describe the requirements for
modification by publicly traded
partnerships under section 6225(c)(5).
This section does not require the
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partnership requesting modification to
provide any particular information
about partners to the IRS, but the
partnership must meet the general
requirement to provide all information
necessary to approve the modification
as described in § 301.6225–2(c)(2).
Specifically, § 301.6225–2(c)(2)(i)
provides that the IRS may set forth in
forms, instructions, and other guidance
the information necessary to request
modification. One comment requested
that the partnership be able to provide
summary information with respect to
modification under § 301.6225–2(d)(5).
The comment specifically suggested that
the regulations provide that a
partnership can substantiate the
availability of specified passive activity
losses by providing summary schedules
reflecting the specific allocations to
each specified partner of the partnership
from the year such partner purchased
units through the year the partnership
receives the FPA.
This comment was received in
response to the June 2017 NPRM, prior
to the addition of the definition of
qualified relevant partner. The
definition of qualified relevant partner
allows partners to be eligible for
modification under § 301.6225–2(d)(5)
provided they are partners through the
year for which the most recent
partnership was filed. For purposes of
the comment, however, the Treasury
Department and the IRS view this
comment as suggesting that the
partnership would provide such
information for whatever years are
relevant for the modification.
The final regulations do not specify
what specific information is required for
modification under § 301.6225–2(d)(5).
Therefore, the regulations do not
address whether summary schedules
would be appropriate. The IRS intends
to issue forms and instructions for
modification procedures which will
provide additional information on what
will be required for modification
procedures under § 301.6225–2(d)(5).
Section 301.6225–2(d)(5)(v) requires
that the partnership report, in
accordance with forms, instructions,
and other guidance prescribed by the
IRS, to each specified partner or
qualified relevant partner the amount of
the reduction in suspended passive loss
carryovers. One comment suggested that
the easiest way to do so is to incorporate
such reporting into the Schedules K–1
distributed to such partner at the end of
the adjustment year. This comment was
received in response to the June 2017
NPRM. Therefore, it could not have
taken into account the rule from the
August 2018 NPRM that allowed for use
of the year of the most recently filed
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return. The final regulations do not
specify the manner in which
information must be reported under
§ 301.6225–2(d)(5)(v). Rather, the
regulations defer the manner of
reporting to forms and instructions. This
provides flexibility to the IRS to gain
experience with the forms it intends to
develop for purposes of assisting
partnerships in complying with the
reporting requirements of § 301.6225–
2(d)(5)(v) and to change those forms in
response to taxpayer feedback, if
necessary, without needing to amend
the regulations.
In light of the change to allow certain
indirect partners to utilize modification
under § 301.6225–2(d)(5), the final
regulations under § 301.6225–2(d)(5)(v)
provide that the IRS may require
reporting to an indirect partner that is
a qualified relevant partner through
forms, instructions, or other guidance.
This rule allows the IRS flexibility to
evaluate and adapt reporting
requirements concerning indirect
partners as the IRS and partnerships
gain more experience with the
centralized partnership audit regime.
vii. Modification Relating to Qualified
Investment Entities
Proposed § 301.6225–2(d)(7) provided
that a partnership may request a
modification of an imputed
underpayment 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). Under § 301.6225–
2(c)(3)(i), the partnership must provide
all information required to request
modification (including modification for
deficiency dividends paid by a QIE
partner) on or before 270 days after the
issuance of the NOPPA. A partnership
may request an extension of this 270day period, subject to the consent of the
IRS. Section 301.6225–2(c)(3)(ii).
Several comments suggested that it is
not ideal for a QIE partner to pay a
deficiency dividend with respect to an
amount or an adjustment that may not
be final. The comments were
specifically concerned that issues may
be unresolved during the 270-day
period after the issuance of the NOPPA
because of possible review by IRS
Appeals. The comments recommended
that the IRS grant extensions of the 270day period under § 301.6225–2(c)(3)(i)
as a matter of course until all relevant
issues concerning the adjustments have
become final.
The IRS plans to adopt procedures
under which the partnership will have
an opportunity to resolve with IRS
Appeals any issues with respect to the
adjustments made during the
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examination prior to the mailing of the
NOPPA. Therefore, all issues with
respect to the adjustments will generally
be resolved at the administrative level
prior to the mailing of the NOPPA and
the start of the 270-day modification
period. Because a request for
modification under § 301.6225–2(d)(7)
will not be submitted until after the
NOPPA has been mailed, the
partnership and its QIE partners should
know with certainty what adjustments
are agreed and which are unagreed at
the time of the modification request.
This timing will allow the partnership
and its QIE partners to evaluate the best
method for modification and to
determine whether modification under
§ 301.6225–2(d)(7) is appropriate.
Accordingly, a rule requiring the
granting of extensions of the 270-day
period as a matter of course is not
necessary.
Moreover, whether an extension of
the modification period is appropriate is
a determination best made on the facts
and circumstances of a particular case.
A rule requiring automatic granting of
extensions would deprive the IRS of the
ability to evaluation an extension
request based on the facts and
circumstances. Therefore, the final
regulations do not require granting
extensions of the 270-day period as a
matter of course. Lastly, the regulations
provide the IRS with the authority to
grant an extension of the 270-day period
when warranted, which also protects
the partnership in cases that it may be
initially unclear whether modification
under § 301.6225–2(d)(7) is appropriate.
Another comment suggested that the
regulations require payment of a
deficiency dividend no later than 60
days after the date the partnership
adjustments are finally determined,
rather than after the NOPPA is mailed
during the 270-day modification period.
Another comment recommended that
the regulations provide that the
allowance of a deficiency dividend be
agreed to in advance of a NOPPA, but
in the event of a challenge to the
underlying substantive adjustment in
IRS Appeals or in court, the allowance
does not become effective until final
resolution of the underlying challenge.
The final regulations do not adopt these
suggestions.
First, as discussed earlier in this
section of this preamble, the IRS
Appeals process that the IRS intends to
implement will already have
determined which substantive
adjustments are agreed to prior to the
issuance of the NOPPA. As a result, the
most likely avenue for a substantive
challenge after modification will be in
court and not with IRS Appeals.
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Second, pursuant to section 6225(c)(7)
and § 301.6225–2(c)(3)(i), everything
required to submitted with respect to a
modification request must be provided
to the IRS within 270 days after the
mailing of the NOPPA. The 270-day
period is designed to ensure a timely
resolution of the audit while also
providing the partnership enough of an
opportunity to modify an imputed
underpayment reflected in a NOPPA. A
rule allowing modifications after that
270-day period expires would
undermine those goals.
Third, allowing modifications after
the adjustments are finally determined
precludes the IRS from approving
modifications in the FPA. As discussed
in section 3.B.ii of this preamble, the
IRS plans to adopt procedures under
which it will approve or deny each
modification request in the FPA.
Accordingly, the regulations do not
permit modifications to be submitted
beyond the 270-day period described in
§ 301.6225–2(c)(3)(i).
One comment recommended that the
regulations clarify that a partnership’s
receipt of a NOPPA is not a
‘‘determination’’ that begins the 90- or
120-day period for a QIE partner’s
issuance and claiming of a deficiency
dividend deduction under section 860.
Section 860(e)(1)–(4) provides that a
‘‘determination’’ means (1) a court
decision; (2) a closing agreement; (3) an
agreement signed by the Secretary and
by the QIE relating to the QIE liability
for tax; or (4) a statement by the QIE
attached to its amendment or
supplement to a tax return. A NOPPA
does not fall into any of these four
categories. Accordingly, a NOPPA is not
a ‘‘determination’’ for purposes of
section 860(e). Moreover, § 301.6225–
2(d)(7)(ii) requires that the partnership
provide documentation of the QIE
partner’s ‘‘determination’’ described in
section 860(e) as part of the
partnership’s request for modification.
This rule makes clear that the
determination in this context is the
determination with respect to the QIE
partner, which does not, by definition,
include the NOPPA mailed to the
partnership. Accordingly, because
section 860(e), when read together with
proposed § 301.6225–2(c)(7)(ii),
addresses the comment’s
recommendation, the comment was not
adopted.
viii. Closing Agreement Modification
Proposed § 301.6225–2(d)(8) provided
that a partnership may request
modification based on a closing
agreement between the IRS and the
partnership or between the IRS and a
relevant partner, or both. One comment
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expressed concern that some partners
might not want to negotiate the details
of their tax return through the
partnership representative and
recommended that the regulations
outline procedures for partners to work
directly with the IRS to enter into
closing agreements as part of the
partnership audit. Although the IRS
may, pursuant to § 301.6223–2(d)(1),
allow a person that is not the
partnership representative to participate
in the examination of the partnership,
the IRS is not required to do so. The
centralized partnership audit regime is
designed to provide for a single, unified
proceeding in which the IRS works
solely with the partnership
representative who has the sole
authority to bind the partnership and all
its partners. Developing a regulatory
procedure that would allow a single
partner to work directly with the IRS,
without working in conjunction with
the partnership representative, during
the partnership examination would
contravene the regime’s central design.
The partnership representative may
request that the IRS work directly with
a partner on a closing agreement or
other issues, but it is solely within the
IRS’s discretion to allow that. See
§ 301.6223–2(d)(1). Accordingly, this
comment was not adopted.
ix. Requests for Additional
Modifications
Section 6225(c)(6) provides that the
‘‘Secretary may by regulations or
guidance provide for additional
procedures to modify imputed
underpayment amounts on the basis of
such other factors as the Secretary
determines are necessary or
appropriate’’ for the purposes of section
6225(c). Proposed § 301.6225–2(d)(10)
provided that a partnership may request
a modification not otherwise described
in § 301.6225–2(d), and the IRS will
determine whether such modification is
accurate and appropriate. 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.
Several comments recommended that
the Treasury Department and the IRS
exercise the authority under section
6225(c)(6) to expand the available types
of modifications under proposed
§ 301.6225–2(d). One comment
recommended additional modifications
related to foreign partners, including a
tax exemption based on section 892 and
a reduction in taxes based on eligibility
for reduced rates of withholding under
a tax treaty. The comment further
recommended that these types of
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modifications and modification for a tax
exemption based on foreign status be
verified using an expanded version of
the existing Forms W–8 and W–9.
Former proposed § 301.6225–2(d)(3)
provided rules regarding modifications
with respect to adjustments allocable to
partners that would not owe tax as a
result of their status as a tax-exempt
entity. Proposed § 301.6225–2(d)(3)(ii)
defined tax-exempt entity to mean a
person or entity defined in section
168(h)(2)(A), (C), or (D). A foreign
person or entity as defined in section
168(h)(2)(C) includes a foreign
government or foreign organization.
Accordingly, to the extent an
adjustment is allocable to a foreign
government or foreign organization, the
partnership may request modification
with respect to such adjustment
provided the requirements of
§ 301.6225–2(c) and (d)(3) are met.
Proposed § 301.6225–2(d)(9), added in
the August 2018 NPRM, provided rules
for tax treaty modifications. Under
proposed § 301.6225–2(d)(9), a
partnership may request modification
with respect to a relevant partner’s
distributive share of an adjustment to a
partnership-related item if the relevant
partner 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, would have
derived the item (within the meaning of
§ 1.894–1(d)) had it been taken into
account properly in the partnership’s
reviewed year return, and 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 of the modification request.
No comments were received on the
tax treaty modification rules proposed
in the August 2018 NPRM. Proposed
§ 301.6225–2(d)(9) is retained and
simplified in the final regulations, with
no change in substance. Accordingly, a
treaty modification is only available to
the extent the relevant partner would
have qualified for the treaty benefit at
issue, whether a rate reduction or
exemption from tax, had the item been
taken into account by the partner in the
reviewed year. In general, that means a
foreign partner may submit a treaty
modification only if the partner was, for
the reviewed year, a treaty resident;
would have derived the item of income
through the partnership, or tiers of
partnerships, if applicable, under the
tax laws of its country of residence;
would have been the beneficial owner of
the item of income (not a nominee or
conduit); would have satisfied the
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limitation on benefits article under the
treaty, if any; and met any other specific
requirement for claiming the benefit
under the treaty, such as a stock
ownership threshold in the case of a
claim for a reduced rate of tax on U.S.
source dividends.
The final regulations do not address,
however, which form will be used for
tax treaty modification, or for any type
of modification. Prescribing the specific
form used for a specific type of
modification in the regulations is
generally not ideal for either taxpayers
or the IRS. The IRS may determine in
the future a different form is more
appropriate or the form number or name
may require revision. Having the
flexibility to prescribe the form without
needing to change the regulations saves
government resources and allows for
expedited guidance to taxpayers.
Another comment expressed concern
that the determination of the imputed
underpayment with respect to
adjustments to CFTEs could result in an
overpayment of taxes by partners under
the centralized partnership audit regime
to the extent that one or more partners
would be eligible to take an additional
foreign tax credit (FTC) as a result of
any adjustments made following the
conclusion of an audit. The comment
recommended that taxpayers should be
permitted to claim FTCs for which they
are eligible, provided that the taxpayer
can provide sufficient evidence to the
IRS when claiming the credit. This
comment was not adopted.
The modification procedures provide
adequate opportunity for a partner to
take advantage of any new FTCs. For
example, the partners may use amended
return modification or the alternative
procedure to take into account all
adjustments that might affect specific
partners, including any new FTCs.
Accordingly, no changes were made to
the regulations in response to this
comment.
Two comments requested that the
Treasury Department and the IRS use
the authority under section 6225(c)(6) to
expand modification and to authorize
an ‘‘Early Decision’’ procedure for
pushing out audit adjustments in tiered
structures in order to address the
administrative concerns of the IRS
related to a tiered push out. This
comment, which was submitted prior to
the amendments by the TTCA to section
6226(b) and the August 2018 NPRM,
was not adopted. Under the rule
proposed in the August 2018 NPRM,
adjustments may be pushed out beyond
the first tier of partners. See proposed
§ 301.6226–3(e) and section 4.C.iii. of
this preamble for further discussion of
the tiered push out rules.
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One comment suggested that, to the
extent an adjustment amount and the
imputed underpayment with respect to
that adjustment amount have already
been reported and tax paid,
modifications should be permitted with
respect to the tax amount paid and not
be limited only to taxes paid in
connection with an amended return.
The comment offered two examples
which might result in an imputed
underpayment being determined on tax
that had already been paid. The first
example would occur if partners file tax
returns with inconsistent positions
under section 6222 that reflect the
income being adjusted in the
examination. The second example
presented by the comment is the
situation in which two or more people
may be deemed by the IRS to have
formed a partnership when they have
individually reported the income being
ascribed to the deemed partnership.
This comment was adopted. The final
regulations under § 301.6225–2(d)(2)(ii)
allow a partnership to satisfy the
requirements of amended return
modification by demonstrating that a
partner previously took into account
such partnership adjustments and their
effect on tax attributes for all relevant
years and made any necessary
payments.
Similarly, one comment
recommended that modification provide
for an alternative to closing agreements
that would allow the partnership to
demonstrate that a partner’s share of an
adjustment was partially or fully
reversed and so the imputed
underpayment should therefore be
reduced to give credit for taxes paid in
a later year. For instance, the
partnership could demonstrate that a
former partner would have paid tax on
capital gain on its partnership interest
and that amount of gain would have,
economically included the amount of an
adjustment. The partnership would
then, pursuant to this recommendation,
be permitted to demonstrate that the
imputed underpayment should be
reduced by a refund in an intervening
year.
The same comment also
recommended that the final regulations
adopt an additional modification type
that would allow the partnership to
demonstrate the impact of adjustments
on one or more of its partners,
specifically with respect to interest
expense and foreign taxes paid. The
comment recommended that the
partnership be able to demonstrate that
the partner’s reporting of these items
was not as beneficial as assumed in the
calculation of the imputed
underpayment.
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These comments were received in
response to the June 2017 NPRM. The
August 2018 NPRM provided rules
relating to the alternative procedure and
also allowed for amended return
modification without regard to sections
6501 and 6511. These additions in the
August 2018 NPRM allow for the types
of modifications the comment was
recommending. For example, under
amended return modification as revised
in the August 2018 NRPM, a partner
files amended returns for the first
affected year and other years to the
extent tax attributes in those years are
affected by taking the adjustments into
account. Whether the partner pays
additional amounts, demonstrates that
on net there is no tax due, or is entitled
to a net refund, provided the partner has
otherwise complied with the
modification requirements, the imputed
underpayment will be adjusted to
remove that partner’s share of the
adjustments if the IRS approves the
modification. Accordingly, the final
regulations do not adopt these
comments because the final regulations
provide other methods for
accomplishing the rules recommended
by the comments.
One comment recommended that the
final regulations expand modification
procedures to allow modification based
on closing agreements by and amongst
the partnership and the relevant
partners entered into in the course of a
proceeding with the Competent
Authority office, in particular to
facilitate the implementation of any
mutual agreement by the IRS in a
manner that is consistent with the
purpose of tax treaties to avoid double
taxation. This modification might
include mutual agreement procedures
but may also include requests for
assistance in the context of partner-level
foreign tax credits and protective
claims. The comment also
recommended that the final regulations
permit multiple closing agreements and
provide procedures for cooperation
between the Competent Authority and
partnership examination teams. This
comment was received in response to
the June 2017 NPRM. The August 2018
NPRM provided for treaty modifications
that were not in the former proposed
regulations, and the final regulations
maintain the added treaty modification
procedure. The final regulations do not
adopt any new modifications that were
not previously proposed in the August
2018 NPRM, but maintain the
modifications based on closing
agreements and treaties. Nothing in the
regulations limits the closing
agreements in a way that would prevent
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a closing agreement, or multiple closing
agreements, entered into during the
Competent Authority process from
being considered in the modification
process.
C. Defenses to Penalties
Proposed § 301.6225–2(d)(2)(viii)
provided that 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 § 301.6225–2(d)(2)
and then filing a claim for refund in
accordance with forms, instructions and
other guidance. One comment
recommended allowing the audited
partnership to submit partner-level
defenses for both direct and indirect
partners as part of the modification
process. According to the comment, a
review by the IRS prior to requiring
payment of the proposed penalties
would permit an early determination
regarding the validity of any partnerlevel defense and reduce economic and
administrative burdens on taxpayers.
The comment suggested that because
penalties can represent a large dollar
amount, the requirement that taxpayers
must provide advance payment of
penalties, even in cases where they have
a valid penalty defense, can create a
significant economic burden on
partners. This comment was not
adopted.
Due to the limited time the IRS has to
review modification requests, the
Treasury Department and IRS have
determined that reviewing penalty
defenses for specific partners in
addition to reviewing the amounts taken
into account on amended returns or in
the alternative procedure submissions is
unadministrable in the time frame
allowed. The core aspect of the
modification procedures is to exclude
partnership adjustments from the
imputed underpayment calculation.
Whether a specific partner is then
entitled to a refund of penalties paid
after taking the adjustments into
account is best determined outside the
modification procedures and not subject
to the time constraints of section
6225(c)(7) and § 301.6225–2(c). The
final regulations, therefore, maintain the
requirement that a partner must first pay
any penalty due with the amended
return filed during modification and
then afterward file a claim for refund of
the penalty in order to raise a partnerlevel defense. However, to address the
concerns raised by the comment, the
final regulations under § 301.6225–
2(d)(2)(viii) give the IRS flexibility to
develop through future guidance
alternative procedures for raising
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partner-level defenses as the IRS gains
more familiarity with the centralized
partnership audit regime.
D. Adjustments That Do Not Result in
an Imputed Underpayment
Proposed § 301.6225–3 addressed the
treatment of adjustments that do not
result in an imputed underpayment.
Proposed § 301.6225–3 provided that a
net negative adjustment resulting from a
reallocation adjustment, which 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 non-separately stated item, as
required by section 702 and is allocated
to adjustment year partners who are also
reviewed year partners with respect to
whom the amount was reallocated.
One comment expressed concerns
with the application of proposed
§ 301.6225–3(b)(4) to publicly traded
partnerships. According to this
comment, the public trading of units of
publicly traded partnerships depends
on their fungibility, which requires that
all items affecting the partners’ section
704(b) capital accounts be allocated pro
rata. The comment suggested that an
allocation under proposed § 301.6225–
3(b)(4) could force an adjustment year
allocation to less than all of the public
unit holders, potentially causing the
units to be non-fungible. This comment
was not adopted at this time, but the
final regulations provide that the IRS
may provide exceptions to the rule
under § 301.6225–3(b)(4) pursuant to
forms, instructions, and other guidance
prescribed by the IRS. As the IRS gains
more experience with the centralized
partnership audit regime, the IRS may
determine to create an exception
through forms, instructions, or other
guidance if doing so would benefit
taxpayers while fulfilling the
requirements of the statute and
remaining administrable for the IRS.
Having the flexibility to create such an
exception through forms, instructions,
and other guidance preserves
government resources and expedites the
process for the IRS to address taxpayer
needs and for taxpayers to be aware of
changes in IRS procedures.
One comment recommended that the
regulations provide examples
demonstrating the proper application of
proposed § 301.6225–3(b)(4). The final
regulations add two such examples
under § 301.6225–3(d). One example
demonstrates the application of the rule
under § 301.6225–3(b)(4) in the context
of a recharacterization adjustment the
other example demonstrates application
of the rule in the context of a
reallocation adjustment.
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One comment recommended that the
rules be clarified regarding whether
netting would be allowed with respect
to adjustments that do not result in an
imputed underpayment in multi-year
audits. The comment asks about a
particular example: If an audit of 2018
results in an imputed underpayment in
2018 and an overpayment in 2019 in
regard to adjustment items, the
proposed regulations would not permit
those amounts to be netted. As
discussed in section 3.A. of this
preamble, partnership adjustments with
respect to different reviewed years are
not netted. If a multi-reviewed-year
audit that resulted in an imputed
underpayment with respect to one
reviewed year and adjustments that do
not result in an imputed underpayment
with respect to a different reviewed year
both had the same adjustment year, then
the expense associated with the
imputed underpayment paid in the
adjustment year is taken into account by
the partnership in the adjustment year
and the adjustments that do not result
in an imputed underpayment would
also be taken into account on the
adjustment year tax return. Expenses
related to payment of an imputed
underpayment are nondeductible under
section 6241(4). As a result, such items
would be taken into account according
to subchapter K principles in the
adjustment year and the extent to which
any items net on the partnership or
partners’ returns would depend on the
particular adjustments and the facts and
circumstances of the partnership and
partners. Instead, the partnership may
also take advantage of modification
procedures and the election under
section 6226 to allow partnership
adjustments to be taken into account
directly by the partners that may,
depending on the facts and
circumstances, allow for different
netting results at the partner level.
Lastly, § 301.6225–3(b)(7) was added
to provide that partners that previously
took into account an adjustment that
does not result in an imputed
underpayment before a notice of
administrative proceeding was mailed
by the IRS or before an administrative
adjustment request was filed by the
partnership do not take into account a
second time the same adjustment that
does not result in an imputed
underpayment. This rule addresses
situations where a partner took a
position inconsistent with the
partnership return as filed and as a
result of that inconsistent position
previously took into account items that
were later determined by the IRS (or by
the partnership in an AAR) to be
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adjustments that do not result in an
imputed underpayment, such as
additional losses or deductions. The
rule is designed to ensure that such
partners do not take the same items into
account again in the adjustment year.
4. Election for Alternative to Payment of
the Imputed Underpayment
Twenty-two comments were received
concerning section 6226, the election for
an alternative to payment of the
imputed underpayment. This section of
this Summary of Comments and
Explanation of Revisions addresses
comments concerning the mechanics
and effect of making an election under
proposed § 301.6226–1; the statements
furnished to partners and filed with the
IRS pursuant to proposed § 301.6226–2;
and the rules regarding how
adjustments are taken into account by
partners in accordance with proposed
§ 301.6226–3. Comments concerning
basis and tax attribute rules under
proposed § 301.6226–4 will be
addressed in future guidance.
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A. Mechanics and Effect of Making an
Election Under Section 6226
The comments received regarding the
mechanics and effect of making an
election under section 6226 cover six
general topics: (1) The time for making
the election; (2) revocations of the
election; (3) making the election when
there are multiple imputed
underpayments or there is no imputed
underpayment; (4) notification by the
IRS that an election is invalid; (5)
making the election and filing a petition
for readjustment under section 6234;
and (6) whether the election should be
mandatory.
i. Time for Making the Election Under
Section 6226
Under section 6226(a) and proposed
§ 301.6226–1(c)(3), a partnership may
make an election under section 6226
(push out election) within 45 days of the
date on which the FPA is mailed by the
IRS. This 45-day period cannot be
extended, and once made, the election
may only be revoked with the consent
of the IRS. See proposed § 301.6226–
1(c)(1), (3).
Several comments recommended
changes to the 45-day period under
proposed § 301.6226–1(c)(3). Some
comments suggested that the
partnership should not be required to
make the push out election until after
there is a final determination of the
partnership adjustments, either as a
result of a defaulted FPA or, if a petition
is filed, a final court decision. Other
comments recommended that the
regulations permit, either automatically
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or upon request, an extension of the 45day period. These comments were not
adopted.
The 45-day period for making an
election under section 6226 is
established by statute. Pursuant to
section 6226(a)(1), section 6225 shall
not apply to an imputed underpayment
if the partnership ‘‘not later than 45
days after the date of the notice of final
partnership adjustment’’ elects the
application of section 6226 with respect
to such imputed underpayment and
furnishes statements to its partners for
the reviewed year under section
6226(a)(2). The partners must then take
into account the adjustments that
resulted in that imputed underpayment.
Consistent with section 6226(a)(1),
proposed § 301.6226–1(c)(3) provided
that an election under § 301.6226–1
must be filed within 45 days of the date
the FPA is mailed by the IRS and that
the time for filing such an election may
not be extended.
Nothing in section 6226 provides for
an exception to the 45-day period
described in section 6226(a)(1), nor does
section 6226 provide that the 45-day
period may be extended by the IRS.
Accordingly, comments suggesting that
the regulations provide that a push out
election may be made later than 45 days
after the date of the FPA, whether as a
general rule or as a result of an
extension, were not adopted.
ii. Revocations of Elections Under
Section 6226
One comment suggested that, as an
alternative to delaying or extending the
45-day period for making the push out
election, the regulations should provide
that the IRS will liberally grant
revocations of a push out election in
certain circumstances, such as in the
case of a settlement of an imputed
underpayment. Another comment
suggested that the regulations should
provide that the IRS will approve any
request to revoke an election upon
completion of the administrative or
judicial proceeding. These comments
were not adopted.
Section 6226(a) provides that an
election under section 6226, once made,
‘‘shall be revocable only with the
consent of the Secretary.’’ Consistent
with section 6226(a), § 301.6226–1(c)(1)
provides that an election under
§ 301.6226–1 may only be revoked with
the consent of the IRS. The requirement
that a revocation only be made with the
consent of the IRS is mandated by the
statute and is critical to the
administration of the collection aspect
of the push out regime. A push out
election relieves the partnership that
made the election under section 6226
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(audited partnership) from the
requirement to pay the imputed
underpayment to which the election
relates and shifts the collection of any
chapter 1 tax resulting from the
partnership adjustment to the partners
of the partnership. In light of the
collection nature of the push out regime,
whether a revocation of a push out
election should be granted largely
depends on the facts and circumstances.
For example, a revocation may benefit
the IRS, the partnership, and its partners
in the case of an agreement by the
partnership to pay at the partnership
level in lieu of pushing out the
adjustments to its partners. On the other
hand, a revocation may prejudice the
IRS and the partners if, for example, the
revocation is granted after statements
have already been furnished to the
partners. In that case, some partners
may have already paid any resulting tax.
If the revocation is significantly
delayed, some partners may be timebarred from filing refund claims. In
turn, any refund claim filed by a partner
would require additional processing by
the IRS, which could become
administratively burdensome
particularly in the case of tiered
structures. Also, the period to assess the
imputed underpayment against the
partnership may have expired at the
time of the revocation request.
Additionally, the audited partnership
may no longer be collectible and, if the
IRS granted a revocation, the IRS would
be required to engage in unnecessary
and costly additional collection
procedures. Requiring consent of the
IRS before a revocation takes effect
ensures flexibility to appropriately
address each circumstance and protects
partners that may have already received
pushed out statements. Accordingly,
comments recommending liberal or
automatic approvals of requests to
revoke push out elections were not
adopted.
iii. Making the Election When There Are
Multiple Imputed Underpayments or
When There Is No Imputed
Underpayment
Under proposed § 301.6226–1(a), if an
FPA includes more than one imputed
underpayment (as described in
proposed § 301.6225–1(g)), a
partnership may make an election under
§ 301.6226–1 with respect to one or
more of the imputed underpayments
identified in the FPA. One comment
suggested that the regulations clarify
whether there are any requirements for,
or limitations on, a partnership’s ability
to make a push out election for different
imputed underpayments. Neither the
proposed regulations nor the final
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regulations under § 301.6226–1(a)
contain any restrictions or limitations
on a partnership’s ability to make an
election under section 6226 for a
particular imputed underpayment
identified in an FPA. For each imputed
underpayment for which the
partnership plans to make a push out
election, the partnership must satisfy
the provisions of §§ 301.6226–1 and
301.6226–2, including the requirement
under § 301.6226–1(c)(3)(ii)(D) that the
election identify the imputed
underpayment to which the election
relates. Because the regulatory text does
not suggest there are any restrictions on
making a push out election with respect
to different imputed underpayments,
the comment seeking further
clarification on this point was not
adopted.
One comment suggested that a
partnership should be allowed to make
an election under section 6226 for a
taxable year for which there is no
imputed underpayment, but for which
there is a tax effect favorable to the
partnership. The comment described an
example in which the IRS determines in
an examination of year 1 that the
partnership should have reported
income originally reported in year 3
ratably over years 1, 2, and 3. In the
example, the IRS determines an
imputed underpayment with respect to
year 1, and the partnership makes a
push out election with respect to that
imputed underpayment. The comment
suggested that a push out election
should be permitted for year 3 as well
to correct the perceived anomalous
result that could occur if the reviewed
year partners did not get the benefit of
the decrease in income with respect to
year 3.
Pursuant to section 6226(a)(1), the
partnership may make a push out
election ‘‘with respect to an imputed
underpayment.’’ Section 301.6226–1(a)
echoes the statutory language by
providing that a partnership may elect
under § 301.6226–1 an alternative to the
payment by the partnership of ‘‘an
imputed underpayment.’’ Accordingly,
to make a push out election under
section 6226(a)(1) and § 301.6226–1,
there must be at least one imputed
underpayment for the taxable year. To
the extent the comment was suggesting
an election should be permitted for a
year in which there is no imputed
underpayment, the comment was not
adopted.
As the comment observed, the
partnership has other options to make
adjustments for year 3. The partnership
in the example could file an AAR for
year 3, provided the period described in
section 6227(c) permitted the filing of
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an AAR for year 3. See 6227(c) and
§ 301.6227–1(b). The modification
procedures may also provide a
mechanism for the partnership and its
partners to benefit from the change to
year 3. For example, the partners may
file amended returns (or utilize the
alternative procedure to filing amending
returns) to take into account the
adjustments to years 1, 2, and 3. See
§ 301.6225–2(d)(2). See also section
6225(c)(9) (allowing modification of
adjustments that do not result in an
imputed underpayment). Additionally,
nothing in the final regulations prevents
the partnership from seeking a closing
agreement with the IRS with respect to
year 3 subject to rules generally
applicable to closing agreements.
iv. Notification That an Election Under
Section 6226 Is Invalid
Under proposed § 301.6226–1(c)(1),
an election under § 301.6226–1 is valid
until the IRS determines that the
election is invalid. If an election is
determined by the IRS to be invalid, the
IRS will notify the partnership and the
partnership representative within 30
days of such determination and provide
the reasons for the determination. See
§ 301.6226–1(d). Former proposed
§ 301.6226–1(c)(2) had provided that if
the IRS makes a final determination that
an election under § 301.6226–1 is
invalid, section 6225 applies with
respect to the imputed underpayment as
if the election were never made and the
partnership must pay the imputed
underpayment. The word ‘‘final’’ was
removed from former proposed
§ 301.6226–1(c)(2) in the August 2018
NPRM to clarify 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. This
clarification was adopted in the final
regulations under § 301.6226–1(d)
(formerly proposed § 301.6226–1(c)(2)).
Under § 301.6226–1(d), the IRS may
determine an election is invalid without
first notifying the partnership or
providing the partnership an
opportunity to correct any failures to
satisfy all of the provisions of
§ 301.6226–1 and § 301.6226–2,
including an opportunity to correct
errors in pursuant to § 301.6226–2(d).
One comment suggested that the
regulations require the IRS to notify the
partnership of its intent to determine
that a push out election is invalid and
provide the partnership with an
opportunity to respond prior to making
a final determination that the election is
invalid. This comment was not adopted.
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An election under section 6226 may
be invalid for a number of reasons and
not every case will present a need to
first communicate with the partnership.
For example, the partnership may make
an election, but never furnish
statements to its partners. Providing the
partnership with a preliminary
determination that the election is
invalid in that case and an additional
opportunity to furnish statements would
undermine the 60-day period for
furnishing statements (see proposed
§ 301.6226–2(b)), which is designed to
support the IRS’s timely collection of
any additional reporting year tax and
provide timely information to reviewed
year partners regarding any additional
reporting year tax. In such a case, the
IRS should have the ability to determine
the election is invalid and to
immediately assess an imputed
underpayment without first notifying
the partnership. Accordingly, the
comment’s suggestion was not adopted.
However, while nothing in the
regulations requires the IRS to first
contact a partnership prior to making a
determination that an election under
section 6226 is invalid, the IRS intends
to develop procedures under which the
IRS will first contact partnerships prior
to determining a push out election is
invalid in certain cases. Those
procedures, if adopted, will be set forth
in future sub-regulatory guidance.
The same comment also suggested
that the partnership should be able to
seek review of a decision by the IRS that
a push out election is invalid in the
United States Tax Court. The United
States Tax Court is a court of limited
jurisdiction. See section 7442. The
Treasury Department and the IRS do not
have authority to confer jurisdiction on
the United States Tax Court. Therefore,
this comment was not adopted.
v. Effect of Filing a Petition for
Readjustment Under Section 6226
Under proposed § 301.6226–1(e)
(§ 301.6226–1(f) in the final regulations),
a partnership that has made an election
under § 301.6226–1 is not precluded
from filing a petition under section
6234(a). Section 6234(a) provides that a
partnership may file a petition in the
Tax Court, a United States district court,
or the Court of Federal Claims, within
90 days of the date on which an FPA is
mailed under section 6231. A petition
under section 6234 may be filed in a
district court or the Court of Federal
Claims only if the partnership filing the
petition makes a jurisdictional deposit
in accordance with section 6234(b).
Proposed § 301.6234–1(b) provide that
the jurisdictional deposit is the amount
of (as of the date of the filing of the
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petition) any imputed underpayment (as
shown on the FPA) and any penalties,
additions to tax, and additional amounts
with respect to such imputed
underpayment.
One comment stated that the
proposed regulations provide no
explanation as to how or whether the
deposit amount under section 6234(b)
may or should be adjusted to reflect a
push out election under section 6226.
The comment recommended the
regulations should provide a
mechanism that would enable a
partnership to file a petition in a district
court or Court of Federal Claims and
still make an election under section
6226, without creating the risk of having
tax on the partnership adjustments paid
twice. The comment suggested that one
possible approach might be to reduce
the deposit amount by the amount that
would be reported by partners that
receive push out statements. The
comment suggested that another
possible approach might be to ensure
that there is a clear mechanism for the
partnership to obtain a refund of the
jurisdictional deposit before any
amounts are paid under the push out by
partners.
Nothing in the proposed regulations
limits a partnership’s ability to file a
petition in a district court or the Court
of Federal Claims if the partnership has
made an election under section 6226
(provided the partnership has made the
jurisdictional deposit required by
section 6234(b)). Proposed § 301.6226–
1(e) expressly provided that a
partnership making the election under
§ 301.6226–1 is not precluded from
filing a petition under section 6234(a)
(which includes petitions in the Tax
Court as well as petitions in district
courts and the Court of Federal Claims).
Accordingly, to the extent the comment
was seeking clarification that a
partnership can both make an election
under section 6226 and file a petition
under section 6234, the comment was
not adopted because the plain language
of § 301.6226–1(f) (proposed at
§ 301.6226–1(e) and renumbered to
§ 301.6226–1(f)) makes clear that a
partnership can take both actions.
Accordingly, no changes were made to
proposed § 301.6226–1 in response to
the comment. To the extent the
comment was seeking to make clear that
a partnership that makes a valid election
under section 6226 with respect to an
imputed underpayment is no longer
liable for that imputed underpayment,
the plain language of section 6226(a)
and § 301.6226–1(b)(2) makes clear that
is the case. The comment’s suggestion
regarding the amount of the
jurisdictional deposit under section
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6234(b) and proposed § 301.6234–1(b) is
addressed in section 9 of this Summary
of Comments and Explanation of
Revisions.
vi. Elective Nature of Section 6226
One comment suggested that the
regulations should make the election
under section 6226 mandatory, unless
provided for otherwise in the
partnership agreement, in two
circumstances in order to mitigate a
partnership representative’s potential
conflict of interest and to provide
protection to partners that are partners
in the adjustment year but not partners
in the reviewed year. The first
circumstance is when the partnership
representative is both a partner in the
reviewed year and the adjustment year,
and the partnership representative’s
interest during the adjustment year is
less than it was in the reviewed year.
The second circumstance is when the
aggregate partnership interest of any
adjustment year partner or group of
partners holding a 20 percent or greater
interest in the partnership is 20 percent
or greater than the interest held by the
same partner or group of partners in the
reviewed year. Because the approach
recommended by the comment is
prohibited by statute, the comment’s
recommendation was not adopted.
Sections 6225 and 6226 provide that
the default rule, absent an affirmative
election by the partnership, is that the
partnership shall pay any imputed
underpayment resulting from the
partnership adjustments. The
regulations cannot switch the default
rule from one that imposes partnership
liability under section 6225 to one that
requires a push out election under
section 6226. Additionally, a
partnership ‘‘elects the application of’’
section 6226 with respect to an imputed
underpayment. Section 6226(a)(1). That
election is statutory and, like under any
other election under the Code, is a
choice by the partnership. It would not
be consistent with the elective nature of
section 6226 to require the partnership
to make a push out election under any
circumstance.
vii. Election Must Include Address for
Each Reviewed Year Partner
Proposed § 301.6226–1(c) required
that an election under § 301.6226–1
must include each reviewed year
partner’s name, address, and TIN. Under
§ 301.6226–2(e), each statement
furnished by the partnership to a
reviewed year partner must include ‘‘the
current or last address of the reviewed
year partner that is known to the
partnership.’’ A partnership should use
the same standard for determining the
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address included for each reviewed year
partner in the election under
§ 301.6226–1 as the address included in
each statement under § 301.6226–2.
Accordingly, the final regulations under
§ 301.6226–1(c) clarify that an election
under § 301.6226–1 must include the
‘‘the current or last address of each
reviewed year partner that is known to
the partnership.’’
B. Statements Furnished to Partners and
Filed With the IRS
The comments received regarding
furnishing statements to partners and
filing the statements with the IRS cover
five general areas: (1) The partners to
whom the statements are furnished; (2)
the timing of when the statements are
furnished; (3) reasonable diligence in
identifying correct addresses; (4) the
effect of failing to properly furnish
statements; and (5) the content of the
statements.
i. Partners to Whom the Statements Are
Furnished
Section 6226(a)(2) requires a
partnership to furnish statements to
‘‘each partner of the partnership for the
reviewed year.’’ Consistent with the
statute, proposed § 301.6226–2(a)
provided that a partnership that makes
an election under § 301.6226–1 must
furnish to each reviewed year partner a
statement reflecting the partner’s share
of partnership adjustments associated
with the imputed underpayment for
which the election under § 301.6226–1
was made. A ‘‘reviewed year partner’’ is
any person who held an interest in the
partnership at any time during the
reviewed year. See proposed
§ 301.6241–1(a)(9). One comment
suggested that the partnership should
only be required to furnish (or have the
option to furnish) statements to partners
that would owe additional tax as a
result of the partnership adjustments.
This comment was not adopted.
The statute does not impose any
qualifications or limitations on which
partners from the reviewed year must be
furnished push out statements. The
statute mandates that the partnership
furnish a statement ‘‘to each partner of
the partnership for the reviewed year.’’
Section 6226(a)(2). This statutory
requirement is unambiguous and as a
result is not being altered in the final
regulations.
In addition, the collection mechanism
of section 6226 is similar to tax
reporting with respect to Schedules
K–1, in that the partnership furnishes
statements to the partners, and the
partners are solely responsible for
determining and self-reporting any tax
due. Additionally, in most cases, the
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partnership will not know whether a
reviewed year partner will owe
additional tax for a particular year as a
result of a push out election. Therefore,
the partnership could not properly
furnish statements without obtaining
additional information about each
partner’s tax situation and determining
to a high degree of certainty whether the
information provided was accurate.
Such an exercise would be burdensome
for the partnership, potentially invasive
to partners, and pose significant tax
administration concerns. Furthermore,
such a rule would require the IRS to
know which partners would ultimately
owe tax as a result of the election to
evaluate whether the partnership
properly furnished statements. While a
partnership may know it is likely that a
particular partner will owe additional
tax under certain circumstances,
crafting a general rule with those
partnerships and circumstances in mind
would be unfair to partnerships that
lack such knowledge or have a means of
obtaining it. In contrast, a rule requiring
the partnership to furnish a statement to
each reviewed year partner, regardless
of whether that partner might owe tax
as a result of the pushed out
adjustments, is more administrable for
the IRS, less burdensome to
partnerships, and required by the
statute.
The same comment also
recommended that the regulations
clarify how adjustments are
communicated to reviewed year
partners who dispose of their interest in
the partnership, including persons who
were partners in the reviewed year but
not the adjustment year and persons
who were only partners in the
intervening years (the years after the
reviewed year but before the adjustment
year). Persons who were only partners
in the intervening years are by
definition not reviewed year partners,
and therefore the partnership is not
required to furnish statements to such
partners under § 301.6226–2. As a
result, partners that were only partners
during intervening years are not
required to take into account
partnership adjustments under
§ 301.6226–3. Therefore, to the extent
the comment was suggesting statements
should be furnished to partners from
intervening years only, this suggestion
was not adopted.
Persons who were reviewed year
partners, but who are not partners
during the adjustment year or some or
all of the intervening years, retain their
status as reviewed year partners
regardless of when they disposed of
their interest. The partnership is
required to furnish statements to its
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reviewed year partners in accordance
with § 301.6226–2. Because the
proposed regulations clearly required
that statements be furnished to all
reviewed year partners, no changes were
made in response to this comment.
ii. Timing of When the Statements Are
Furnished
Two comments were received
regarding the timing of the statements
furnished by a partnership to its
reviewed year partners. The first
comment suggested that the regulations
should provide that a partnership will
not be required to furnish statements
under proposed § 301.6226–2 until after
the partnership has exhausted its rights
to challenge the audit adjustments
through an administrative or judicial
proceeding.
Under proposed § 301.6226–2(b)(1), a
partnership that makes an election
under § 301.6226–1 must furnish
statements to its reviewed year partners
(and file those statements with the IRS)
no later than 60 days after the date all
of the partnership adjustments to which
the statement relates are finally
determined. Partnership adjustments
become finally determined upon the
later of the expiration of the time to file
a petition under section 6234 or, if a
petition under section 6234 is filed, the
date when the court’s decision becomes
final. Proposed § 301.6226–2(b)(1)(i),
(ii). Once the time to file a petition has
expired, or if a petition is filed, the
court’s decision has become final, the
partnership has exhausted its ability to
challenge the partnership adjustments
through administrative and judicial
avenues. Accordingly, because the plain
language of proposed § 301.6226–2(b)(1)
reflected the rule suggested by this
comment, no changes were made in
response to this comment.
The second comment suggested that
the due date for the statements under
proposed § 301.6226–2 should align
with the due date for the partnership’s
Schedule K–1s and that extensions of
the statement due date should be
permitted to accommodate the
complexity of the calculations necessary
for the accurate distribution of the
adjustments among the partners. The
comment stated that not having the
statement due date coincide with the
Schedule K–1 due date would create
confusion among the partners and likely
result in less timely compliance. This
comment was not adopted.
Under section 6226(a) and (b), each
reviewed year partner that is furnished
a statement takes into account the
partnership adjustments reflected on
that statement by adjusting the partner’s
chapter 1 tax for the taxable year which
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includes the date the statement was
furnished by the partnership (the
reporting year). Therefore, the date the
statement is furnished by the audited
partnership determines which taxable
year a partner (either direct or indirect)
will pay tax as a result of taking into
account the partnership adjustments
(the additional reporting year tax). For
example, if a reviewed year partner is
furnished a push out statement on
March 15, 2022 with respect to
reviewed year 2020, the partner must
report and pay its additional reporting
year tax on the partner’s return for the
2022 taxable year, which, for
individuals, would be considered timely
filed on April 17, 2023 (April 15, 2023
is a Saturday). In contrast, when a
partner receives a Schedule K–1, the
partner is required to report the items
on that Schedule K–1 on the tax return
for the taxable year that has just ended.
For example, if a partner receives a
Schedule K–1 on March 15, 2022 for the
2021 taxable year, the partner must
report the items on that Schedule K–1
on the partner’s return for the 2021
taxable year, which, for individuals,
would be due on April 15, 2022.
These examples illustrate the
impediments to aligning the push out
statement due date with the Schedule
K–1 due date or with providing
extensions of the statement due date.
First, reviewed year partners who
simultaneously receive both a push out
statement and a Schedule K–1 may be
required to report the items on those
statements in different taxable years.
While the receipt of tax documents at
the same time of year might have some
superficial appeal, there is a risk of
causing confusion about when and how
to take into account the information on
those documents. For instance,
receiving the push out statement at the
same time as the Schedule K–1 could
result in a belief by the partner that the
partner is supposed to report the
amounts on the push out statement in
the same year as the items on the
Schedule K–1, which would likely be
incorrect. In addition, the reviewed year
partners, to whom the push out
statements must be furnished, may not
be the same as the partners for whom
Schedule K–1s are required. Therefore,
requiring the statements to be furnished
at or around the same time may also
create confusion for the partnership.
Second, aligning the push out
statement due date with the Schedule
K–1 due date or allowing extensions
would significantly delay the reporting
and payment of the additional reporting
year tax by reviewed year partners,
which is contrary to the interests of
sound tax administration. A delay in the
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reporting and payment of the additional
reporting year tax would also increase
the amount of interest partners would
be liable for under section 6226(c). For
example, if a reviewed year partner is
furnished a push out statement on
March 15, 2022 with respect to
reviewed year 2020 under proposed
§ 301.6226–2 that statement reflects
adjustments that were finally
determined on or after January 15, 2022
(within the past 60 days). However, if
instead the regulations provided that a
statement may be furnished by the
Schedule K–1 due date for the year in
which the adjustments become finally
determined (2022), the push out
statement would not need to be
furnished until March 15, 2023
(assuming no extensions). Under such a
rule, the reviewed year partner would
not be required to pay the additional
reporting year tax until April 15, 2024,
a full year after the partner would pay
under the proposed regulations. See
§ 301.6226–3(b).
Accordingly, it is in the interests of
sound tax administration to require the
push out statements to be furnished
expeditiously for all adjustments that
are finally determined more than 60
days from the end of the calendar year
because the additional reporting year
tax is required to be paid with the return
for the year in which the statement is
furnished. This reporting and payment
system also benefits partners by
ensuring that reviewed year partners are
furnished the push out statement close
in time to the final determination of the
partnership adjustments, allowing the
reviewed year partners to determine any
additional reporting year tax, effects on
tax attributes, and make payments to
stop interest from continuing to run.
For these reasons, the comment
recommending alignment of the push
out statement due date with the
Schedule K–1 due date was not
adopted. The recommendation that the
push out statement due date be subject
to extension also was not adopted for
the reasons described in this section of
this preamble.
In the case of a tiered structure,
however, the comments’
recommendation to align the push out
statement due date with the Schedule
K–1 due date is reflected in § 301.6226–
3(e). Under § 301.6226–3(e)(3)(ii), passthrough partners must furnish
statements to their affected partners no
later than the extended due date for the
return for the adjustment year of the
audited partnership. This due date
aligns the push out statements furnished
by pass-through partners with the
extended Schedule K–1 due date for the
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audited partnership, accommodating, in
part, the comment’s recommendation.
iii. Reasonable Diligence in Identifying
Correct Address of Reviewed Year
Partner
Under proposed § 301.6226–2(b)(2), a
partnership must furnish statements to
each reviewed year partner in
accordance with the forms, instructions,
and other guidance prescribed by the
IRS. If the partnership mails the
statement, the partnership 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 as undeliverable, the
partnership must undertake reasonable
diligence to identify a correct address
for the reviewed year partner to which
the statement relates. Proposed
§ 301.6226–2(b)(2).
One comment suggested the final
regulations clarify that a master limited
partnership (a publicly traded
partnership as defined in section 7704)
satisfies the reasonable diligence
requirement under proposed
§ 301.6226–2(b) if the partnership
utilizes the same procedures it uses for
undeliverable Schedule K–1s.
According to the comment, a master
limited partnership (MLP) normally
sends the Schedule K–1 to the address
provided to the MLP by the partner’s
broker; MLPs provide call centers and
web-based support that allow partners
to directly provide updated contact
information to the partnership; and
MLPs typically do not attempt to update
partners’ addresses by using public
name and address databases, but will
update an address if mail is returned
with a forwarding address.
The regulations under the centralized
partnership regime are rules of general
applicability for all partnerships. The
procedure suggested by the comment
would be cost-prohibitive for many
partnerships. The Treasury Department
and the IRS decline to provide a safe
harbor in the final regulations solely for
partnerships with the means to operate
a call center. Additionally, it is not
administrable to create special rules for
different categories of partnerships as
this would result in a multitude of
special rules that in some cases may be
contradictory and under inclusive. It
may also create additional burdens for
partnerships that cannot comply with a
general rule designed with only a
specific type of partnership in mind.
As the IRS gains experience with the
centralized partnership audit regime
and the push out election in particular,
the Treasury Department and the IRS
may consider whether further guidance
regarding reasonable diligence would be
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beneficial for partnerships. For purposes
of the final regulations, however, the
comment’s suggestion was not adopted,
and the final regulations maintain the
rule that the partnership undertake
reasonable diligence when a statement
is returned undeliverable.
In addition, the final regulations
under § 301.6226–2(b)(2) clarify that if
after undertaking reasonable diligence
the partnership identifies a correct
address for the reviewed year partner,
the partnership must mail the statement
to the reviewed year partner at that
correct address.
iv. Effect of Failing To Properly Furnish
Statements
Several comments suggested that the
regulations clarify the effect of a
partnership’s failure to properly furnish
statements under § 301.6226–2 has on
the validity of an election under section
6226. One comment recommended
clarification of whether a failure to
undertake reasonable diligence under
proposed § 301.6226–2(b)(2) with
respect to a single partner would make
the entire election under section 6226
invalid or only the portion allocable to
that specific partner. Similarly, another
comment recommended that the
regulations clarify that a failure to
furnish the statement to one partner
would mean the push out election was
still effective with respect to the other
reviewed year partners, but that the
partnership would be liable for the tax
attributable to the partner who was not
properly furnished a statement.
Pursuant to section 6226(a)(1), an
election under section 6226 is made
‘‘with respect to an imputed
underpayment.’’ Section 6226(a)(2)
requires a partnership to furnish
statements to ‘‘each partner’’ of the
partnership for the reviewed year.
Accordingly, the IRS may invalidate an
election under section 6226(a) for any
failure to meet the requirements of
§ 301.6226–1, regarding how an election
must be made, or § 301.6226–2,
regarding the manner in which
statements must be furnished. Because
an election under section 6226(a) is
‘‘with respect to an imputed
underpayment’’ and not with respect to
each specific partnership adjustment
that resulted in that imputed
underpayment, an election under
section 6226 is either valid or invalid
with respect to the entire imputed
underpayment for which the election
was purportedly made.
Nothing in the regulations, however,
requires the IRS to determine that a
purported election under section 6226 is
invalid in situations where the
partnership fails to fully comply with
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§ 301.6226–1 or § 301.6226–2. To the
contrary, pursuant to § 301.6226–1(c)(1),
a push out election is valid unless and
until the IRS determines that the
election is invalid. Accordingly, if a
partnership makes an election under
§ 301.6226–1 and furnishes statements
to 99 out of 100 reviewed year partners,
the partnership’s push out election is
valid unless and until the IRS
determines the election is invalid.
Several comments suggested that the
regulations provide a safe harbor that
would satisfy the requirement to furnish
statements to all reviewed year partners.
Two comments suggested that the
regulations adopt a de minimis rule
providing that a failure to deliver a
certain number of push out statements,
or statements representing a de minimis
amount of the pushed out adjustments,
would not invalidate a partnership’s
election under section 6226. One
comment recommended that the
regulations provide that a partnership’s
push out election will not be
invalidated if the partnership has
substantially complied with the
regulatory requirements. Another
comment suggested that the regulations
provide that a partnership will be
deemed to have made a valid election
under section 6226 if the partnership
makes a good faith effort to furnish push
out statements to all of its partners.
Another comment recommended that
the regulations clarify that the
obligation to furnish a statement to each
reviewed year partner is deemed
satisfied if the partnership in good faith
furnishes a statement to each partner to
whom it was required to send a
Schedule K–1 for the reviewed year.
These comments were not adopted.
As an initial matter, proposed
§ 301.6226–2 did not require that the
statements be delivered in order for the
partnership’s election under section
6226 to be valid. Rather, proposed
§ 301.6226–2(b)(2) required the
partnership to furnish statements to
partners in accordance with forms,
instructions, and other guidance; mail
the statements to the current or last
address of the partner that is known to
the partnership, and undertake
reasonable diligence to identify a correct
address for any returned statement.
Compliance with the regulations does
not require actual delivery, which is
illustrated by proposed § 301.6226–
2(b)(3), Example 1.
With respect to the suggestion that the
regulations adopt a de minimis,
substantial compliance, or good faith
rule for failure to properly furnish
statements to partners, these suggestions
were not adopted. The push out regime
is a collection mechanism in lieu of
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collecting the imputed underpayment
from the audited partnership. The
benefit to the audited partnership by
making a push out election is that the
partnership is no longer liable for the
imputed underpayment to which the
election relates. One of the requirements
to obtain this benefit is that the
partnership must furnish correct
statements to all of the partnership’s
reviewed year partners. Until the
statements have been furnished and the
partners determine their additional
reporting year tax, the tax implications
for each partner as a result of taking into
account the pushed out adjustments is
uncertain. The additional reporting year
tax for each partner may differ greatly,
ranging from an increase in tax, a
decrease in tax, or no liability at all.
None of the rules suggested by the
comments—de minimis safe harbor,
substantial compliance, good faith
standard—takes into account the
asymmetric tax consequences of the
pushed out adjustments in the hands of
the partners. For instance, a large
percentage of adjustments may be
allocated to one or a few partners and
a failure to furnish statements to this de
minimis number of partners would
impede the proper collection of a large
percentage of additional reporting year
tax. Similarly, relatively small
numerical adjustments may have
significant tax effects on partners. A de
minimis rule, whether based on the
number of statements or amount of
adjustments, would frustrate the
collection aspect of section 6226.
Additionally, a de minimis rule would
present tax administration challenges
because a partnership can pick and
choose which statements to furnish to
which partners, so long as the number
of statements furnished or the amount of
the pushed out adjustments fell within
the de minimis amount. Good faith and
substantial compliance rules present the
same concerns.
Other provisions in the regulations
mitigate against the concerns expressed
by the comments. As previously
discussed in this section of this
preamble, under § 301.6226–2(b)(2) a
partnership must send a push out
statement to the current or last address
of the partner that is known to the
partnership. Doing so is generally
sufficient for purposes of satisfying the
address requirements of § 301.6226–2.
Additionally, the general versus specific
imputed underpayment rules also
mitigate concerns about being unable to
properly furnish a statement to a
particular partner or group of partners.
The partnership may request that the
IRS designate a specific imputed
underpayment with respect to the
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6509
adjustments allocable to a partner or
group of partners if the partnership has
concerns about furnishing a statement to
that partner or group of partners. See
proposed § 301.6225–2(d)(6). For
example, if the partnership lacks current
address information for a specific
partner, the partnership may request a
specific imputed underpayment for that
partner’s share of the adjustments, pay
the specific imputed underpayment,
and make a push out election for the
general imputed underpayment.
Two comments expressed concerns
about situations when the partner no
longer exists or is deceased or when the
partnership does not have current
contact information for a former partner.
One of these comments suggested that
once a partnership has furnished
statements to its partners and to the IRS,
the partnership has fulfilled its
obligations under section 6226. The
other comment specifically stated that
neither the partnership nor the
remaining partners should have any
liability for the imputed underpayment
or associated interest and penalties with
respect to adjustments allocable to
partners that are no longer in existence
or who are deceased.
Nothing in the statute or the proposed
regulations provides that the
partnership or any remaining partners
are liable for any amounts that are
allocable to reviewed year partners who
are no longer in existence or are
deceased. Under section 6226(a) and
proposed § 301.6226–1, there are only
two requirements for a partnership to
make an election under section 6226.
One, the partnership must make an
election under section 6226(a)(1) and
§ 301.6226–1 within 45 days of the date
the FPA is mailed by the IRS. Two, the
partnership must furnish statements to
each partner from the reviewed year in
the time and manner prescribed by
§ 301.6226–2. The plain language of
proposed § 301.6226–1(c)(1) made clear
that if a valid election is made under
§ 301.6226–1, the partnership is not
liable for the imputed underpayment to
which the election applies.
Additionally, under proposed
§ 301.6226–2(f), only a partner’s
allocable share of the partnership
adjustments are included on the
statement furnished to that reviewed
year partner. Pursuant to § 301.6226–3,
only the adjustments reflected on the
statement furnished to the reviewed
year partner must be taken into account
by that partner. To the extent the
comment expressed concern about the
partnership lacking a current address for
a partner that no longer exists, is
deceased or is otherwise a former
partner, the proposed regulations
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provide that the partnership may
furnish statements to the last address
known to the partnership. Only if the
statements are returned as undeliverable
is the partnership required to undertake
reasonable diligence to ascertain a
current address. Accordingly, no
revisions to the final regulations were
made in response to this comment.
v. Corrections of Errors in Statements
As discussed in section 4.B.iv. of this
preamble, several comments expressed
concerns about the requirement to
furnish statements to all of the
partnership’s reviewed year partners.
Although those comments were not
adopted, the ability to correct errors in
statements mitigates the potential effects
of this rule. Proposed § 301.6226–2(e)
provided that the partnership must
provide correct information in the
statements it furnishes to its partners
and files with the IRS. Proposed
§ 301.6226–2(d)(2)(i) provided that if a
partnership discovers an error in a
statement within 60 days of the
statement due date, the partnership
must correct that error, and may do so
without IRS consent. If a partnership
discovers an error more than 60 days
after the statement due date, the
partnership may only correct the error
after receiving IRS consent. Proposed
§ 301.6226–2(d)(2)(ii). Additionally,
when the IRS discovers an error in a
statement, the IRS may require the
partnership to correct that error or to
provide additional information.
Proposed § 301.6226–2(d)(3).
The correction rules under proposed
§ 301.6226–2(d) were designed to
require a partnership that identifies an
error in a statement to correct that error
expeditiously. Similarly, nothing in the
regulations prevents a partner that
receives a statement containing an error
from alerting the partnership of the error
within the 60-day period so that the
audited partnership can correct the
error. Even if the partnership corrects
errors within the 60-day period,
however, proposed § 301.6226–1(c)(2)
provided the IRS could invalidate the
election.
In light of the comments in section
4.B.iv of this preamble regarding the
effect on the push out election of
failures to furnish correct statements,
the Treasury Department and the IRS
have revised the rule under proposed
§ 301.6226–1(c)(2). The 60-day
correction period should serve as a
period of time after the statements are
furnished to verify that the information
on the statements was correct and to
rectify any errors without adverse
consequences regarding the push out
election to the partnership or its
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partners. The ability to correct
statements gives the partnership an
opportunity to ensure statements were
furnished properly and, to the extent a
correction can cure the identified
defects, to take steps to ensure that an
election under section 6226 will not be
invalidated. The ability to correct errors
also ensures that partners have the
correct information when the partners
take into account the adjustments
reflected on the statements.
Accordingly, the final regulations
under § 301.6226–1(d) clarify that the
IRS may not invalidate an election
based on errors that are timely corrected
by the partnership in accordance with
§ 301.6226–2(d). However, any errors in
any statements furnished by the
partnership are subject to penalty under
section 6722 and the regulations
thereunder. See § 301.6226–2(a). In the
case of errors discovered by the IRS, 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. The IRS may,
instead, invalidate the election.
One comment recommended changes
to the correction process under
§ 301.6226–2(d) and the timing of the
correction period. Specifically, the
comment suggested with respect to
errors discovered by a partnership, the
partnership should have an automatic
obligation and right to issue corrected
statements for errors discovered no later
than 60 days after the extended due date
of the audited partnership’s adjustment
year return. The comment also
suggested that for errors discovered by
the partnership after this date, the
partnership must notify the IRS, and
unless the IRS objects within 90 days of
such notification, the partnership must
issue the corrected statements. The
comment suggested that if the IRS issues
a denial within the 90-day period, such
denial shall include an explanation for
the denial, and the partnership shall
have the ability to challenge the
decision with IRS Appeals. These
suggestions were not adopted.
It is not in the interest of sound tax
administration to place a limit on the
time the IRS has to consider whether to
allow corrected statements after 60 days
from the due date of the statements. For
example, a partnership may request to
make a correction at a time when the
period of limitations on assessing
additional tax for the affected partners
was closed, but the period of limitations
for requesting a refund as to other
affected partners was still open. If the
IRS was unable to process the request to
issue corrected statements within 90
days, the corrected statements would be
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furnished to the partners and those
partners would take into account the
adjustments. If the IRS determines that
the correction of the errors was
insufficient, the IRS could determine
the partnership’s election under section
6226 was invalid, but the period of
limitations on assessing the imputed
underpayment may have expired by that
time. By requiring IRS permission
before any corrected statements are
furnished, the IRS can evaluate each
request based on the facts and
circumstances and ensure that any
proposed corrections are consistent with
the determinations made during the
partnership proceeding and would not
frustrate the collection of any amounts
owed as a result of the partnership
proceeding. Requiring IRS permission
also incentivizes partnerships to submit
correct statements by the due date,
which ensures that partners are
provided timely and accurate
information with which to take into
account the adjustments. Because
partners may have already taken into
account the adjustments, any
corrections received by the partners
after they have taken into account the
adjustments could detrimentally affect
those partners.
The same comment also suggested
that with respect to errors discovered by
the IRS, the IRS may not unreasonably
refuse to permit a partnership to issue
corrected statements if correction of the
error results in a reduced tax liability by
the affected partners or to correct the
allocation of an adjustment between
partners. This comment was not
adopted. To extent this comment was
suggesting that the regulations require
the IRS to require the partnership to
correct errors the IRS discovers in these
circumstances, the comment was not
adopted. The IRS needs discretion to
evaluate whether requiring the
correction of errors is in the interest of
sound tax administration. For example,
the errors may be de minimis or the
correction of the errors may result in
barred assessments or require partners
to file amended returns if they have
already taken into account the
adjustments. To the extent the comment
was suggesting that the IRS should not
unreasonably withhold consent in
situations where the partnership has
discovered errors, the comment was also
not adopted. As stated earlier in this
section of this preamble, the IRS needs
the flexibility to evaluate requested
changes based on the facts and
circumstance of each request.
vi. Contents of the Statements
Under proposed § 301.6226–2(e), each
statement described in proposed
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§ 301.6226–2 must include an
enumerated list of items, including the
partner’s name and taxpayer
identification number (TIN) and any
other information required by forms,
instructions, and other guidance
prescribed by the IRS. Several
comments suggested that the IRS assign
a unique control number or other
numerical code to a notice of final
partnership adjustment and require that
all push out statements with respect to
an imputed underpayment reflected on
that FPA include that control number.
The IRS intends to adopt this suggestion
by assigning a unique control number to
each examination under the centralized
partnership audit regime and by using
that number for each form, letter, or
other document used in the examination
as well as any forms or statements
utilized for a push out election. The
final regulations, however, do not
include the audit control number as an
enumerated item under § 301.6226–2(e).
Requiring the control number through
the forms and instructions provides the
IRS with the flexibility to gain
experience with the use of a unique
control number and to make changes, as
necessary, without needing to amend
the regulations. This flexibility
preserves government resources and
also expedites the process for taxpayers
to be aware of changes in IRS
procedures.
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C. Adjustments Taken Into Account by
Partners
The comments regarding how
adjustments are taken into account by
partners covered five general areas: (1)
The calculation of the additional
reporting year tax; (2) penalties,
additions to tax, and additional
amounts; (3) pass-through partners; (4)
qualified investment entities and master
limited partnerships (MLPs); and (5) the
examples under proposed § 301.6226–
3(h).
i. Calculation of the Additional
Reporting Year Tax
Former proposed § 301.6226–3(a)
provided that the chapter 1 tax for each
reviewed year partner for the reporting
year was increased by the additional
reporting year tax, which was generally
defined as the aggregate of the
correction amounts determined under
former proposed § 301.6226–3(b). Under
former proposed § 301.6226–3(b), the
aggregate of the correction amounts was
determined by adding the amount by
which a reviewed year partner’s chapter
1 tax would have increased for the first
affected year with the amount by which
the partner’s chapter 1 tax for any
intervening year would have increased
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if the adjustments were taken into
account in the first affected year.
Because the rule did not account for any
decrease in a reviewed year partner’s tax
for a taxable year, former proposed
§ 301.6226–3(b)(1) provided that a
correction amount for any taxable year
could not be less than zero and that any
amount less than zero could not reduce
any other correction amount.
Section 206(e) of the TTCA amended
section 6226(b) to provide that, when a
reviewed year partner takes into account
the adjustments under section 6226(b),
the partner’s chapter 1 tax for the
reporting year is adjusted by the
amounts the partner’s chapter 1 tax for
the first affected year or any intervening
year would increase or decrease if the
partner’s share of the adjustments were
taken into account in the first affected
year. The TTCA amendments to section
6226(b) were adopted in the August
2018 NPRM. Proposed § 301.6226–3(b),
as revised in the August 2018 NPRM,
provided that each reviewed year
partner’s chapter 1 tax for the reporting
year is increased or decreased by the
additional reporting year tax, as
appropriate. Under proposed
§ 301.6226–3(b)(2) and (3), the
correction amounts are the amounts by
which the partner’s chapter 1 tax would
increase or decrease if the partner’s
taxable income for that year were
recomputed by taking into account the
partner’s share of the partnership
adjustments. Under proposed
§ 301.6226–3(b)(1), as revised, a
correction amount for the first affected
year or any intervening year may be less
than zero, and any correction amount
less than zero may reduce any other
correction amount.
The final regulations under
§ 301.6226–3(b)(1) were further revised
to provide that nothing in § 301.6226–3
entitles any partner to a refund of tax
imposed by chapter 1 to which such
partner is not entitled. This language
clarifies that the rules under section
6226 and 6227 are consistent insofar as
those rules concern the ability of a
partner to claim a refund of an
overpayment when taking into account
partnership adjustments. See
§ 301.6227–3(b)(1). Whether an
overpayment exists is determined by the
Code and existing law outside the scope
of these regulations. See section 5.D. of
this preamble for further discussion.
Proposed § 301.6226–3(b)(2) and (3)
provided that when computing a
correction amount for the first affected
year or any intervening year, partners
should account for the amount of tax
shown on an amended return for such
year, ‘‘including an amended return
filed, or alternative to an amended
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return submitted, under section
6225(c)(2) by a reviewed year partner.’’
The final regulations under § 301.6226–
3(b)(2) and (3) remove the language
referring to the alternative procedure for
filing amended returns under section
6225(c)(2). Amounts assessed based on
submissions under the alternative
procedure more appropriately fall
within the amounts described in
§ 301.6226–3(b)(2)(ii)(B) and
(b)(3)(ii)(B). Accordingly, treating such
amounts as akin to amounts shown on
amended returns could have led to
inaccurate correction amounts. As such,
the final regulations under § 301.6226–
3(b)(2)(ii)(B) and (b)(3)(ii)(B) have been
revised to clarify that the amounts
under those provisions include not only
the amounts described in § 1.6664–2(d),
but also any amounts not included on
the return of a partner which are
assessed against and collected from the
partners. Such amounts include
amounts paid as part of modification
under § 301.6225–2, including under
the alternative procedure or in
accordance with a closing agreement.
Such amounts do not include, however,
any amounts paid with an amended
return filed as part of modification
because those amounts are included
with the amounts shown on a return or
amended return under § 301.6226–
3(b)(2)(ii)(A) and (b)(3)(ii)(A).
Several comments received prior to
the TTCA amendments recommended
that the calculation of the additional
reporting year tax under former
proposed § 301.6226–3(b) be revised to
account for potential decreases to a
reviewed year partner’s chapter 1 tax
had the adjustments been taken into
account. Certain comments stressed that
it was critical for taxpayers to receive
symmetrical treatment under section
6226 with respect to adjustments for
overpayments or other adjustments that
would serve to reduce the additional
reporting year tax. One comment
suggested that a decrease in tax in one
year as a result of the adjustments
should be able to reduce the additional
tax payable with respect to any other
taxable year. One comment specifically
recommended that former proposed
§ 301.6226–3(b) be revised to provide
that the correction amount for a partner
is the amount by which the reviewed
year partner’s chapter 1 tax would
increase or decrease for the first affected
year and all intervening years.
The plain language of section 6226(b),
as amended by the TTCA, and proposed
§ 301.6226–3(a) and (b), as revised in
the August 2018 NPRM, make clear that
any decreases in tax that result from
taking into account the adjustments can
produce a correction amount, and in
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turn an additional reporting year tax,
that is less than zero. Accordingly,
because the recommendations made by
the comments were reflected in the
proposed regulations, no changes were
necessary in response to those
comments.
Another comment recommended that
the regulations clarify how information
would be communicated to reviewed
year partners to calculate a correction
amount under section 6226(b)(2)(B) for
an intervening year and suggested that
partners calculate only the net increase
in tax in each intervening year. The
comment described an example of an
adjustment that results from timing
differences and recommended that the
push out statement include the
beneficial effect of deductions, if any, in
subsequent years.
Consistent with section 6226(b)(2)(B),
proposed § 301.6226–3(b)(3) provided
that a correction amount for an
intervening year is the amount the
partner’s chapter 1 tax for such year
would increase or decrease after taking
into account any adjustments to tax
attributes that resulted from taking into
account the partnership adjustments in
the first affected year. Accordingly, in
order to determine an intervening year
correction amount, the partner needs to
know the partnership adjustments for
the reviewed year, which is information
provided on the push out statement
furnished to the partner. See
§ 301.6226–2(e). No changes were made
to the regulation to respond to the
comment’s request for clarification on
this point. Regarding the comment’s
suggestion that the correction amount
for any intervening year be calculated
by reference to the partner’s net increase
in tax, the rule under § 301.6226–3(b)(3)
accommodates this suggestion because
it accounts for both increases and
decreases that would have occurred in
an intervening year. Therefore, no
changes were made to the regulations in
response to this suggestion.
The comment also recommended that
the regulations provide that each
partner calculates the correction
amounts as though drafting an amended
return and that such calculation should
be based on generally applicable rules
under the Code. The plain language of
proposed § 301.6226–3(b)(2) and (3)
provided precise rules for calculating
the correction amounts. Those rules are
consistent with how underpayments
and overpayments are generally
calculated elsewhere in the Code and
regulations and thus provide for the
method the comment recommended.
See, for example, § 1.6664–2. Forms and
instructions will provide additional
guidance for partners in computing
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correction amounts and the additional
reporting year tax. Providing this
additional guidance through forms and
instructions allows for both the IRS and
taxpayers to gain experience with those
documents and to recommend and to
make changes, as necessary and
appropriate, without needing to amend
the regulations. This informal guidance
process preserves government resources
and expedites the process by which the
IRS can respond to taxpayer needs and
by which taxpayers are made aware of
changes in IRS procedures. Accordingly,
no changes were made to the regulations
in response to this comment.
Two comments observed that an audit
under the centralized partnership audit
regime may be concluded after the
statute of limitations for amending
partner returns has expired. The
comments recommended that the statute
of limitations should be automatically
extended to allow partners time to file
an amended return and claim a refund.
To the extent these comments were
concerned about the inability to benefit
from any decreases in tax that would
have resulted from taking into account
the adjustments under section 6226(b),
those concerns are addressed by
proposed § 301.6226–3(b) as revised in
the August 2018 NPRM. As discussed
earlier in this section of this preamble,
the plain language of § 301.6226–3(b)
allows partners to account for increases
and decreases that would have resulted
in the first affected year or any
intervening year were the adjustments
taken into account in those years.
To the extent the comment was
addressing seeking refunds via amended
returns outside the push out process,
§ 301.6225–2(d)(2) allows for
modification of the imputed
underpayment via partner amended
returns for taxable years for which the
period of limitations would otherwise
be expired. See section 6225(c)(2)(D). To
the extent the comment was seeking a
mandatory extension of all partner
(direct and indirect) statutes of
limitation to file amended returns and
claim a refund, it is not in the interests
of sound tax administration to provide
for automatic extensions where other
mechanisms provide adequate remedies
for taxpayers. Under both the push out
process and the amended return
modification procedures, partners may
benefit from decreases in tax that result
from partnership adjustments. Creating
an additional automatic extension
process to achieve the same results
potentially leads to more administrative
burden for the IRS without any tangible
benefit for partners. Accordingly, the
comments’ recommendation for
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automatic extensions in order to file
refund claims was not adopted.
Two comments suggested that the
final regulations clarify whether a
partner must calculate and pay any
additional taxes due under chapters 2
and 2A of the Code when taking into
account adjustments under section
6226(b). One comment specifically
asked about the application of chapters
2 and 2A in the context of an election
by the taxpayer to pay the safe harbor
amount. Another comment asked about
the consequences of failing to pay
chapter 2 or 2A tax if the regulations
imposed such a requirement.
First, regarding the comment specific
to the safe harbor amount, the safe
harbor amount was removed from the
regulations in the December 2017
NPRM, no comments were received
regarding its removal, and the final
regulations do not include a safe harbor
amount. Accordingly, inasmuch as this
comment was concerned about the safe
harbor amount, this comment was not
adopted.
Regarding the other comments,
section 6226(b)(1) provides that each
partner’s ‘‘tax imposed by chapter 1’’
shall be adjusted by the aggregate of the
correction amounts determined under
section 6226(b)(2). Both section
6226(b)(2)(A) and (B) describe the
correction amounts as amounts by
which the partner’s ‘‘tax imposed under
chapter 1’’ would increase if the
partner’s share of the adjustments were
taken into account. Consistent with
section 6226(b), proposed § 301.6226–
3(b) provided that each partner’s
chapter 1 tax for the reporting year is
increased or decreased by the amounts
by which the partner’s chapter 1 tax
would increase or decrease were the
adjustments taken into account. The
plain language of the statute and the
proposed regulations makes clear that a
reviewed year partner only increases its
chapter 1 reporting year tax by the
aggregate of the correction amounts,
which are calculated by reference to the
amounts by which the partner’s chapter
1 tax would increase or decrease for the
first affected year or any intervening
year. Therefore, no changes were made
to § 301.6226–3(b) in response to this
comment. Furthermore, because the
regulations do not require payment of
chapter 2 or 2A taxes when a partner
takes into account adjustments under
section 6226(b), the consequences of
failing to pay those taxes is beyond the
scope of the regulations.
ii. Penalties, Additions to Tax, and
Additional Amounts
Former proposed § 301.6226–3(a)
provided that a reviewed year partner
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must pay the partner’s share of any
penalties, additions to tax, or additional
amounts determined at the partnership
level reflected on the statement
furnished to the partner under
§ 301.6226–2. See former proposed
§ 301.6226–2(e)(7) and (f)(3). Example 1
in former proposed § 301.6226–3(g)
illustrated the application of this rule.
In the example, the IRS determines an
imputed underpayment and a related
accuracy-related penalty in the amount
of $32. The partnership elects the
application of section 6226 with respect
to the imputed underpayment and
furnishes a statement to partner A, a 25
percent partner, reflecting A’s share of
the adjustments and A’s share of the $32
penalty amount ($8). The example
concludes that A must pay its $8 share
of the penalty with its reporting year
return.
One comment expressed concern with
Example 1 under former proposed
§ 301.6226–3(g), particularly the result
that a partner pays a penalty amount
based on the amount of the
partnership’s imputed underpayment,
rather than the amount of the partner’s
increased tax liability. The comment
recommended the regulations clarify
that penalties are not measured by
reference to the imputed underpayment
amount determined at the partnership
level.
This comment was addressed by
proposed § 301.6226–3(d), as revised in
the December 2017 NPRM. As revised,
proposed § 301.6226–3(d)(2) provided
that a reviewed year partner calculates
the amount of any penalty, addition to
tax, or additional amount at the partner
level by treating a correction amount
determined under § 301.6226–3(b) as if
it were an underpayment or
understatement for the first affected year
or intervening year, as applicable. If,
after taking into account the partnership
adjustments, the reviewed year partner
did not have an underpayment, or had
an underpayment that fell below the
applicable threshold for the imposition
of a penalty, no penalty would be due
from the reviewed year partner.
Proposed § 301.6226–3(d)(2).
Accordingly, the proposed regulations
make clear that a partner’s penalty is not
based on the imputed underpayment
amount determined at the partnership
level, as recommended by the comment.
Example 1 under § 301.6226–3(h) was
also revised to account for this rule
change.
I. Penalty Defenses
Former proposed § 301.6221(a)–1(c)
had provided that any defense to any
penalty, addition to tax, or additional
amount must be raised by the
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partnership in the partnership-level
proceeding, regardless of whether the
defense was based on facts and
circumstances relating to a person other
than the partnership. As discussed in
section 1.A of this preamble, former
proposed § 301.6221(a)–1(c) was
removed from the regulations in the
December 2017 NPRM. As part of the
revisions in the December 2017 NPRM,
the regulations under section 6226
(former proposed § 301.6226–3(i)) were
also revised to provide that the
calculation of the partner’s penalty
amount in the case of a push out
election is based on the characteristics
of, and facts and circumstances
applicable to, the reviewed year partner.
In addition, a reviewed year partner
claiming that a penalty, addition to tax,
or additional amount is not due because
of a partner-level defense may raise that
defense, but must first pay the penalty
and file a claim for refund for the
reporting year. See proposed
§ 301.6226–3(d)(3), as revised in the
August 2018 NPRM.
One comment recommended that the
regulations clarify that a partnership
that makes a push-out election will be
able to avail itself of partner-level
defenses at the partnership level. For
the reasons discussed in section 8.A. of
this preamble, this comment was not
adopted. Under § 301.6233(a)–1(c)(1), a
partner-level defense may not be raised
in a proceeding of the partnership,
including a partnership that makes an
election under section 6226, except as
otherwise provided in guidance
prescribed by the IRS.
Two other comments recommended
that the regulations should provide a
mechanism for partners to raise partnerlevel defenses prior to assessment,
rather than requiring the partner to first
pay the penalty and then file a claim for
refund to raise the partner-level defense.
One comment specifically suggested
that a partner could raise a partner-level
defense in the push out context by
submitting a statement supporting that
defense with the partner’s reporting year
return. This comment further suggested
that the requirement to pre-pay
penalties is contrary to the procedures
in place for similar scenarios involving
amended returns and audit adjustments.
These comments were not adopted.
First, to the extent the comment
addresses procedures for amended
returns and audit adjustments other
than partnership adjustments, those
procedures are beyond the scope of
these regulations. The centralized
partnership audit regime is a new set of
procedures that does not have an
existing parallel in other areas of
procedural tax law, and, as such, other
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6513
scenarios involving amended returns
and audit adjustments are not
sufficiently similar to provide a relevant
baseline against which to determine
how the centralized partnership audit
procedures should be developed.
Second, under the centralized
partnership audit regime, the
applicability of penalties, additions to
tax, and additional amounts that relate
to partnership adjustments is
determined at the partnership level.
Section 6221(a). A push out statement
furnished to a partner under
§ 301.6226–2 will include any penalties,
additions to tax, or additional amounts
determined at the partnership level that
are applicable to the adjustments
pushed out to that partner. The
applicability of such penalties,
additions to tax, and additional amounts
as set forth in the push out statement
furnished to the partner are binding on
the partner pursuant to section 6223.
See § 301.6226–1(e). Therefore, when
taking into account the pushed out
adjustments, the applicability of any
penalties related to those adjustments
has already been determined. The
imposition and amount of the penalty is
determined only upon the partner
calculating the additional reporting year
tax (or imputed underpayment in the
case of pass-through partners) and
applying any relevant threshold
amounts.
Because the IRS has already
determined that a penalty applies, it is
contrary to the interests of sound tax
administration to allow partners to
argue they are not liable for the penalty
based on partner-specific reasons
without first requiring payment of the
penalty. Allowing a partner to raise a
partner-level defense without prepaying
the penalty would require the IRS to
check each reviewed year partner’s
return to see if a penalty defense was
properly raised and open up an
examination of the partner to determine
the validity of the defense. Such a
process would frustrate the collection of
the penalties, the applicability of which
was already determined at the
partnership level in an examination.
Requiring pre-payment of penalties
before defenses are raised ensures that
partners raise only colorable penalty
defense claims. For those that do not
have such claims, it will ensure
immediate collection of the appropriate
amount of penalties.
One comment observed that, as a
practical matter, it is unclear how a
limited partner would dispute penalties
determined at the partnership level,
particularly because the partner may
have no or limited information of
actions at the partnership level or
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control over such actions even if known.
The comment recommended clarifying
what constitutes reasonable cause or
good faith under circumstances that will
be common among partnerships with
limited partners.
Proposed § 301.6226–3(d)(3) defined
partner-level defenses as those defenses
that are personal to the reviewed year
partner and based on the facts and
circumstances applicable to that partner
(for example, a reasonable cause and
good faith defense under section 6664(c)
based on facts specific to a particular
partner). Limited partners will have an
opportunity to raise defenses specific to
their facts and circumstances. The
partners (limited partner or otherwise)
should have all of the information
needed to adequately raise a partnerlevel defense because that defense is
based on the facts and circumstances
applicable to the specific partner raising
the defense. The partner does not need
new information regarding partnershiplevel actions or control over
partnership-level information that the
partner did not have access to at the
time it took a position on its return
reflecting the items from the partnership
subject to penalty. The centralized
partnership audit regime does not alter
the existing law under the Code,
regulations, or applicable case law
relating to reasonable cause and good
faith determinations. Furthermore, as
discussed in section 8.A of the
preamble, any defense that is based on
the conduct or actions of the
partnership is a partnership-level
defense that must be raised by the
partnership during the partnership
proceeding. See proposed
§ 301.6233(a)–1(c)(2)(v).
II. Partnership Payment of Penalties on
Behalf of Partners
One comment recommended that the
partnership have the option of paying
penalties at the partnership level while
pushing out the partnership adjustments
to its partners. The comment noted that
pushing out penalties may require long
and complex explanations regarding
why the penalties apply, which could
be burdensome to the partnership,
partners, and the IRS, and may cause
friction among the partners.
Section 6226(c)(1) provides that any
penalties, additions to tax, or additional
amounts shall be determined as
provided under section 6221, and the
partners of the partnership for the
reviewed year shall be liable for any
such penalty, addition to tax, or
additional amount. If the partnership
were to pay any penalties, additions to
tax, or additional amounts in lieu of
pushing out those amounts to its
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partners, the payment would be a
payment towards the liability of the
partners, not the partnership. The
ability of a person to make a payment
towards another’s tax liability currently
exists outside of the centralized
partnership audit regime, and the
regime does not alter or affect this
ability. The partnership and its partners
may enter into a business arrangement
whereby the partnership makes a
payment towards the partner’s penalty
liabilities, or whereby the partnership
remits an amount to each partner to
compensate for any potential penalties,
additions to tax, or additional amounts.
Nothing in the regulations under
§ 301.6226–3 would disturb those types
of arrangements.
At the same time, the regulations do
not provide a specific method for
making such payments. Creating and
monitoring a separate system to allow
for partnerships to pay penalties on
behalf of its partners would be
burdensome for the IRS, partnerships,
and partners. As discussed earlier in
this section of the preamble, under
proposed § 301.6226–3(d)(2) a partner’s
penalty amount is calculated based on
the facts and circumstances unique to
each partner. For the partnership to
fully pay the amount of penalties owed
by its partners, the partnership would
need to obtain detailed information
about each partner’s personal tax
situation, which is burdensome for the
partnership and potentially invasive to
the partners. This information would
also have to be transmitted to the IRS to
verify the correct penalty amount was
paid and reflected in each partner’s
account. For these reasons, this
comment was not adopted.
Another comment similarly suggested
that the IRS create a process by which
the partnership could pay both interest
and penalties on behalf of its foreign
partners so that those foreign partners
would not need to obtain a TIN to file
a U.S. tax return to report and pay
interest and penalties. The comment
suggested that the IRS could require, as
part of that process, the partnership to
obtain documentation from the foreign
partner authorizing the partnership to
make the payment on the foreign
partner’s behalf. The comment also
recommended that the regulations make
clear such a payment would not
preclude the partnership from making a
push out election with respect to the
adjustments. This comment was not
adopted.
As discussed earlier in this section of
this preamble, there are administrative
difficulties involved with adopting a
specific method for a partnership to
determine and pay over to the IRS its
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partners’ amounts of penalties and
interest. Further, because penalties and
interest are determined at the partner
level, a partnership will generally not be
able to pay the exact amount of
penalties and interest due with respect
to each foreign partner. Therefore, there
would be no basis for waiving the filing
requirement for a foreign partner under
these circumstances, even in cases in
which the partnership is able to satisfy
the tax due at source. For these reasons,
the comment’s suggestion was not
adopted and no changes were made to
the regulations in response to the
comment.
III. Interest on Penalties, Additions to
Tax, and Additional Amounts
Section 6226(c)(2) provides that in the
case of a push out election, interest shall
be 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. Proposed § 301.6226–
3(c)(1) provided that interest on each
correction amount greater than zero is
calculated from the due date (without
extension) of the reviewed year
partner’s return for the applicable
taxable year until the amount is paid.
For purposes of calculating interest on
any penalties, additions to tax, or
additional amounts, proposed
§ 301.6226–3(c)(2) similarly provided
that such interest is calculated from the
due date (without extension) of the
reviewed year partner’s return for the
applicable taxable year until the amount
is paid.
One comment observed that section
6226(c)(2) is silent as to whether the due
date of the return for the purpose of
calculating interest is determined with
or without regard to any extension of
time for filing, and noted that the statute
does not differentiate between interest
on tax and interest on penalties and
additions to tax. The comment
recommended the regulations adopt a
bifurcated approach under which
interest would run on the correction
amounts from the due date of the return
without regard to extensions while
interest on penalties would run from the
due date of the return including any
extensions. The comment observed a
similar bifurcated approach exists for
calculating interest on tax and certain
penalties outside the partnership
context.
After consideration, the Treasury
Department and the IRS have adopted
this comment to be consistent with the
method of calculating interest on
penalties outside of the centralized
partnership audit regime pursuant to
section 6601(e)(2)(B). Accordingly,
§ 301.6226–3(c)(2) now provides that
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interest on any penalties, additions to
tax, or additional amounts is calculated
from the due date (including any
extension) of the reviewed year
partner’s return for the applicable tax
year until the amount is paid.
IV. Interest on the Additional Reporting
Year Tax
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 explained in section 4.A of
the preamble to the August 2018 NPRM,
while 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, the TTCA did not
similarly amend the reference to
‘‘increases’’ in section 6226(c)(2). The
result of the changes to section 6226 is
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 on 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) provided 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.
One comment suggested that the final
regulations clarify that the IRS will pay
interest on any refunds issued on prior
overpayments resulting from a
taxpayer’s statements filed under
section 6226 with their reporting year
return. The comment expressed the
belief that the rule under section
6226(c)(2) is only intended to increase
the normal statutory rate of interest
imposed, not to exclude interest on
overpayments.
The additional reporting year tax is
calculated under section 6226(b)(2) by
reference to the amount that a partner’s
chapter 1 tax ‘‘would’’ increase or
decrease if the partner’s share of
adjustments ‘‘were taken into account’’
in the first affected year or in the case
of an intervening year, the amount by
which such tax would increase or
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decrease by reason of the adjustment to
tax attributes. An adjustment to a tax
attribute is any tax attribute which
‘‘would have been affected’’ if the
adjustments ‘‘were taken into account’’
in the first affected year. Under the
language of section 6226(b)(2) and (3),
adjustments are not actually taken into
account like they would be if an
amended return was filed under
§ 301.6225–2(d)(2). Similarly, the
increases or decreases do not actually
occur as they would in the amended
return context and tax attributes are not
actually adjusted as part of this
calculation. Accordingly, in the case of
an increase in tax that would result in
the first affected year or any intervening
year if the adjustments were taken into
account, no overpayment results for any
year because there is an increase in tax,
not a decrease. In the case of a decrease
in tax that would result in the first
affected year or any intervening year if
the adjustments were taken into
account, there is no overpayment
because the determination of a decrease
in tax is merely by reference to the
relevant year to be taken into account as
part of the total additional reporting
year tax. Therefore, no overpayment
interest is due and owing to the partner.
iii. Pass-Through Partners
The June 2017 NPRM reserved on the
issue of how a pass-through partner
takes into account its share of
adjustments reflected on a statement
furnished to the pass-through partner
under § 301.6226–2. In response to the
June 2017 NPRM, multiple comments
recommended that pass-through
partners take into account adjustments
by pushing out those adjustments to the
next tier of partners and suggested
approaches to achieve this result.
After careful consideration of those
comments, the December 2017 NPRM
adopted an approach that required a
pass-through partner to take into
account adjustments reflected on a push
out statement by either furnishing
statements to its own partners or by
paying an amount calculated like an
imputed underpayment with respect to
the adjustments, plus any applicable
penalties and interest. See former
proposed § 301.6226–3(e)(1). The
regulations created an iterative process
under which any pass-through partner
receiving a statement from another passthrough partner must also take into
account the adjustments on the
statement by furnishing statements to its
own partners or paying an amount
calculated like an imputed
underpayment. Any ultimate, non-passthrough partner was required to take
into account its share of the adjustments
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6515
as if such partner was a reviewed year
non-pass-through partner. If a passthrough partner failed to take into
account the adjustments in accordance
with former proposed § 301.6226–
3(e)(1), the pass-through partner was
required to pay an amount calculated
like an imputed underpayment plus any
applicable penalties and interest.
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
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. The
rules under former proposed
§ 301.6226–3(e) were revised in the
August 2018 NPRM to reflect the
amendment to section 6226(b)(4). See
section 4.A. of the preamble to the
August 2018 NPRM.
Three comments were received
regarding proposed § 301.6226–3(e). The
comments focused on three topics: (1)
The statements furnished under
proposed § 301.6226–3(e)(3); (2) the
computation of an imputed
underpayment under proposed
§ 301.6226–3(e)(4); and (3) the payment
of the additional reporting year tax by
affected partners in accordance with
proposed § 301.6226–3(e)(4)(iv).
I. Statements Furnished Under
§ 301.6226–3(e)(3)
Proposed § 301.6226–3(e)(1) provided
that each pass-through partner that is
furnished a statement described in
§ 301.6226–2 with respect to
adjustments of an audited partnership
must file and furnish statements to its
affected partners. Affected partners are
persons that held an interest in the passthrough partner at any time during the
taxable year of the pass-through partner
to which the adjustments in the
statement relate. Consistent with section
6226(b)(4)(B), proposed § 301.6226–
3(e)(3)(ii) provided that a pass-through
partner must furnish such statements no
later than the extended due date for the
return for the adjustment year of the
audited partnership. One comment
recommended that the regulations
provide a process by which a passthrough partner could apply to the IRS
for a discretionary short-term extension
of the time period set out in proposed
§ 301.6226–3(e)(3)(ii). This extension
would address exceptional or unusual
circumstances in which a pass-through
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partner is unable to furnish the
statements to all its affected partners
within the specified time frame. This
comment was not adopted.
Section 6226(b)(4)(B) expressly
provides that statements under section
6226(b)(4)(A) ‘‘shall be furnished by not
later than the due date for the return for
the adjustment year of the audited
partnership.’’ The statute does not
provide for an extension beyond the
extended due date of the adjustment
year return. Under proposed
§ 301.6226–3(e)(3)(ii), the adjustment
year return 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. As a
threshold matter, the language of section
6226(b)(4)(B), providing that statements
‘‘shall be furnished not later than’’ the
due date suggests that discretionary
extensions are not permissible.
Furthermore, the due date for furnishing
statements to affected partners must be
fixed for all pass-through partners for
the IRS to ensure statements are
furnished timely and payments are
timely made. In addition, the ultimate
affected partners are obligated to file
and pay additional reporting year tax by
the extended due date of the audited
partnership. Extending the due date for
furnishing statements to affected
partners for any pass-through partner
would cause delays for upper tier
affected partners and potentially subject
ultimate affected partners to penalties
for filing or paying additional reporting
year tax more than 30 days after the
extended due date. Therefore, the
regulations do not provide for
discretionary extensions of the time
period that was set forth in proposed
§ 301.6226–3(e)(3)(ii).
Another comment observed that the
proposed regulations did not specify
who at the IRS must receive the
statements furnished by a pass-through
partner and recommended that the final
regulations clearly state to whom at the
IRS pass-through partner statements
should be directed. This comment was
not adopted, but the regulations were
revised to provide that a pass-through
partner must file and furnish statements
to its affected partners in accordance
with forms, instructions, or other
guidance prescribed by the IRS.
Providing the method for filing and
furnishing statements in forms,
instructions, and other guidance
provides the IRS with the flexibility to
change the filing and furnishing
procedures as appropriate and necessary
without needing to amend the
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regulations. This flexibility is
particularly important as the IRS gains
experience with the centralized
partnership audit regime. Flexibility
also preserves government resources
and will expedite the process for the IRS
to respond to taxpayer needs and for
taxpayers to be aware of changes in IRS
procedures.
Under § 301.6226–3(e)(3)(iii), each
statement furnished by a pass-through
partner must include correct
information concerning certain
enumerated items. These items include
the name and TIN of the affected partner
to whom the statement is being
furnished as well as any other
information required by forms,
instructions, and other guidance
prescribed by the IRS. One comment
suggested that the regulations should
clarify whether a statement provided
under proposed § 301.6226–3(e) would
be effective without the TIN of the
affected partner if the affected partner is
a foreign person not otherwise required
to obtain a TIN. The comment observed
that foreign persons generally are not
required to obtain a U.S. TIN,
particularly if they will not claim the
benefits of a U.S. tax treaty.
Proposed § 301.6226–3(e)(3)(iii)
required each statement furnished by a
pass-through partner to include the
correct TIN of the affected partner. This
information is critical to the
administration of the push out regime
because it allows the IRS to identify the
person to whom the statement is
furnished, and it provides the IRS with
the ability to match the adjustments on
that statement with the return filed by
the affected partner. In response to this
comment, however, the final regulations
require that a push out statement
furnished under § 301.6226–3(e) include
the partner’s TIN ‘‘or alternative form of
identification as prescribed by forms,
instructions, or other guidance.’’ See
also § 301.6226–2(e) (imposing the same
requirement for push out statements
furnished to reviewed year partners). In
addition, the election under § 301.6226–
1 by the audited partnership must
include the TIN ‘‘or alternative form of
identification as prescribed by forms,
instructions, or other guidance’’ for each
reviewed year partner of the
partnership. See § 301.6226–1(c)(3)(ii).
The addition of the quoted language in
each section contemplates that there
may be situations in which an
alternative form of identification for
certain partners is warranted.
Accordingly, as the IRS gains
experience with the centralized
partnership audit regime, the IRS may
allow for the use of an alternative form
of identification through forms,
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instructions, or other guidance if the IRS
determines such identification is
appropriate for foreign persons. This
flexibility gives the IRS and
partnerships time to evaluate whether
an alternative form of identification is
administrable and beneficial without
needing to amend the regulations to
allow for alternative identification,
which preserves government resources
and expedites the process by which the
IRS responds to taxpayer needs and
taxpayers become aware of changes in
IRS procedures.
The same comment also
recommended that to the extent
practicable, the IRS identify as soon as
possible any additional information that
may be required in additional forms,
instructions, or other guidance for
statements under § 301.6226–3(e)(3).
The comment suggested regulations or
drafts of forms or instructions could
identify such additional information,
which would allow partnerships to
timely, completely, and accurately
collect necessary data from partners to
comply with requirements and avoid
the risk that the IRS would deny a push
out election due to incomplete or
inaccurate or untimely data.
As discussed earlier in this section of
the preamble, maintaining the ability to
require additional information on forms,
instructions, or other guidance gives the
IRS the flexibility to adapt statements
without having to amend the
regulations. At the same time, the IRS
recognizes the need of taxpayers to
know of the information required to not
jeopardize compliance with the
regulations. The IRS plans to develop
and release drafts of forms and
instructions for public inspection as
soon as possible.
In addition to the changes described
earlier in this Summary of Comments
and Explanation of Revisions, two other
clarifying changes were made to
§ 301.6226–3. First, § 301.6226–
3(e)(3)(iii)(M) was clarified to provide
that the information required to be
included in statements furnished to
affected partners regarding the
applicability of penalties, additions to
tax, or additional amounts are the
determinations made at the audited
partnership level pertaining to the
applicability of penalties, additions to
tax, or additional amounts. This change
reinforces the notion that the
applicability of penalties is determined
at the audited partnership level and that
penalties attach to adjustments as they
are pushed out through the tiers. An
affected partner that pays an imputed
underpayment or additional reporting
year tax independently determines the
amount of any penalty applicable to
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adjustments that are taken into account
by the affected partner.
In addition, § 301.6226–3(e)(4)(iv)(B)
was clarified to provide that when
determining interest on an imputed
underpayment paid by a pass-through
partner, the imputed underpayment is
treated as if it were a correction amount
for the first affected year. This change
conforms the language in § 301.6226–
3(e)(4)(iv)(B) with the language in
§ 301.6226–3(c) regarding interest on
correction amounts.
II. Modifications Available to PassThrough Partner Paying an Imputed
Underpayment
If a pass-through partner does not
furnish statements, the pass-through
partner must compute and pay an
imputed underpayment in accordance
with proposed § 301.6226–3(e)(4).
Section 6226(b)(4)(A)(ii)(II); proposed
§ 301.6226–3(e)(2). Pursuant to
proposed § 301.6226–3(e)(4)(iii), this
imputed underpayment is computed in
the same manner as an imputed
underpayment under section 6225 and
§ 301.6225–1. In calculating an imputed
underpayment under proposed
§ 301.6226–3(e)(4)(iii), a modification is
taken into account if it was approved by
the IRS under § 301.6225–2 with respect
to the pass-through partner (or any
relevant partner holding its interest in
the audited partnership through the
pass-through partner) and it is reflected
on the statement furnished to the passthrough partner. Any modification that
was not approved by the IRS under
§ 301.6225–2 may not be taken into
account. Proposed § 301.6226–
3(e)(4)(iii).
One comment suggested that it was
unclear under proposed § 301.6226–
3(e)(4) whether a pass-through partner
that elects to pay an imputed
underpayment is only permitted to
make modifications that are included on
the information statement furnished to
the pass-through partner or whether the
pass-through partner also may make
modifications based on the pass-through
partner’s own partners (to the extent
such modification is not already
reflected on the information statement).
The comment recommended that the
pass-through partner be permitted to
make modifications based on its own
partners to the extent the pass-through
partner would be permitted to make
modifications under section 6225 if it
were the partnership directly under
audit. This comment was not adopted.
Section 6226(b)(4)(A)(ii)(II) provides
that a partnership may compute and pay
an imputed underpayment under rules
similar to the rules of section 6225
(other than section 6225(c)(2), (7), and
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(9)). Section 6226(b)(4)(A)(ii)(II) does
not explicitly carve out section
6225(c)(8), which provides that any
modification of the imputed
underpayment amount under section
6225(c) shall be made only upon
approval of such modification by the
Secretary. Consistent with section
6225(c)(8), proposed § 301.6226–
3(e)(4)(iii) only allows modifications
approved by the IRS under proposed
§ 301.6225–2 to be taken into account in
calculating an imputed underpayment
with respect to a pass-through partner.
Modifications approved by the IRS
under § 301.6225–2 are only those
modifications requested by the audited
partnership and approved during the
administrative proceeding with respect
to the audited partnership. See
§ 301.6225–2(b). A pass-through partner
may not use modifications that were not
requested or approved in the
administrative proceeding with respect
to the audited partnership in calculating
its imputed underpayment under
proposed § 301.6226–3(e)(4).
Allowing a pass-through partner to
apply modifications that were not
previously requested or approved in
calculating its imputed underpayment is
contrary to the centralized nature of an
administrative proceeding under the
centralized partnership audit regime.
Partnership adjustments are determined
at the partnership level. Section 6221(a).
The imputed underpayment is a
partnership-related item and therefore
modifications to the imputed
underpayment are determined at the
partnership level. The modification
provisions under § 301.6225–2 are the
appropriate method for determining
whether and to what extent a
modification should be allowed.
Allowing pass-through partners to raise,
for the first time, modifications during
the push out is inconsistent with
making such determinations at the
partnership level. Allowing such
modifications would create significant
administrative burdens for the IRS. For
one, the IRS would have to expend
increased time and resources to review
any modifications applied during push
out that were not previously evaluated
and approved during the modification
process at the audited partnership level.
This concern would be exacerbated in
situations where there are multiple tiers
of entities applying multiple types of
additional modifications. For instance, a
pass-through partner might raise again a
modification that was rejected by the
IRS at the audited partnership level
during the modification process,
causing further administrative delay and
burden. Furthermore, if a modification
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applied by a pass-through partner was
incorrectly applied, the IRS would have
to expend time and resources to correct
the incorrectly claimed modification,
resulting in additional delays in the
collection of amounts due as a result of
the examination and the push out
election.
III. Payment of Additional Reporting
Year Tax by Affected Partners
Proposed § 301.6226–3(e)(3)(iv)
provided that affected partners that are
not pass-through partners must take into
account their share of adjustments
reflected on a statement furnished under
proposed § 301.6226–3(e)(3) in
accordance with proposed § 301.6226–
3(e). When taking into account the
adjustments, an affected partner that is
not a pass-through partner bases its
reporting year on the date the audited
partnership furnished its statements to
its reviewed year partners. As a result,
the reporting year of an affected partner
that is not a pass-through partner will be
the same taxable year as the reporting
year of a reviewed year partner that is
also not a pass-through partner.
As discussed in section 1 of the
Explanation of Provisions in the
preamble to the December 2017 NPRM,
there may be circumstances in which a
statement is not furnished to an affected
partner that is not a pass-through
partner in time for the partner to report
and pay the additional reporting year
tax by the unextended due date of the
partner’s return for the reporting year.
To account for this situation, proposed
§ 301.6226–3(e)(3)(iv) provided that the
IRS will not impose any additions to tax
under section 6651 related to any
additional reporting year tax if an
affected partner that is not a passthrough partner reports and pays any
additional reporting year tax within 30
days of the extended due date for the
return for the adjustment year of the
audited partnership.
One comment recommended that the
30-day period under proposed
§ 301.6226–3(e)(3)(iv) should be
extended to at least 60 days and that
there be a mechanism for requesting and
obtaining an extension of this deadline
when needed. This comment was not
adopted.
While it may be difficult to accurately
compute and pay the additional
reporting year tax in situations where
the affected partner receives the
statement close in time to the extended
due date of the reporting year return, the
affected partner has options available to
mitigate any additions to tax under
section 6651. First, the regulations
under § 301.6226–3(e)(3)(iv) provide a
30-day period in which the IRS will not
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impose a section 6651 penalty. Second,
the affected partner may make an
estimated tax payment prior to the due
date for the reporting year and use that
payment as a credit against any
potential liability for the additional
reporting year tax to avoid failure to pay
penalties.
Third, the affected partner may also
request that any additions to tax under
section 6651 be abated due to
reasonable cause. Nothing in the
regulations under the centralized
partnership audit regime alters the
mechanisms by which a taxpayer may
raise a reasonable cause defense in
response to a proposed penalty. Existing
regulations under § 301.6651–1(c)(1)
and the Internal Revenue Manual
provide procedures for raising a
reasonable cause defense to avoid an
addition to tax under section 6651. If an
addition to tax under section 6651 is
asserted because a taxpayer did not pay
the entire additional reporting year tax
within 30 days of the extended due date
of the audited partnership’s adjustment
year return, the taxpayer may follow
those existing procedures to raise any
reasonable cause and good faith defense
that may be applicable to the taxpayer’s
delay in payment.
iv. Qualified Investment Entities and
MLPs
Proposed § 301.6226–3(b)(4) provided
rules for qualified investment entities
(QIEs), such as real estate investment
trusts and regulated investment
companies, to utilize the deficiency
dividend procedures under section 860
when taking into account the
adjustments under section 6226(b). One
comment recommended that the
Treasury Department and the IRS adopt
the rules as proposed in § 301.6226–
3(b)(4) without change in the final
regulations. This comment was adopted.
Another comment recommended that
in the case of an MLP, the safe harbor
calculation for a partner should take
into account the partner’s share of
specified passive activity losses within
the meaning of section 6225(c)(5)(B). As
discussed earlier in this section of the
preamble, the safe harbor amount was
removed from the regulations in the
December 2017 NPRM, no comments
were received regarding its removal, and
the final regulations do not include a
safe harbor amount. Accordingly, this
comment was not adopted.
v. Examples Under Proposed
§ 301.6226–3(h)
Proposed § 301.6226–3(h) provided
examples that illustrated the rules of
proposed § 301.6226–3. One comment
recommended that additional examples
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be added to § 301.6226–3(h) to show the
proper treatment of two situations. The
first situation involved the IRS
approving a modification based on a
partner filing an amended return, the
partnership challenging the IRS’s
adjustment in Tax Court, and the
amount of the adjustment being
subsequently reduced. The second
situation involved the IRS determining
at the partnership level a 20 percent
accuracy-related penalty with respect to
the partnership adjustments and the IRS
approving a modification based on a
partner’s status as a tax-exempt entity.
The comment suggested that the
example illustrate how the amount of
the penalty is calculated in this
situation after allowance for the
modification with respect to the taxexempt entity and how the penalty is
allocated among all partners, including
the tax-exempt entity.
These hypotheticals were described
within the portion of the comment
addressing section 6226. Therefore,
notwithstanding that the comment did
not explicitly state that the partnership
in the hypothetical made a push out
election, for purposes of addressing
these comments it is assumed that the
partnership did make the push out
election. After careful consideration, the
Treasury Department and the IRS have
declined to add these examples because,
as described in this section of the
preamble, both situations describe fact
patterns that are addressed by a straight
forward application of the proposed
regulations, as revised in the December
2017 and August 2018 NPRMs, and thus
the examples would not help clarify any
aspect of the rules.
The first situation is addressed by
proposed § 301.6226–3(b)(2) and (3),
which provided that in calculating a
correction amount, decreases in tax
should be taken into account and that
amounts shown on amended return
filed during modification should be
accounted for in the calculation. As
described earlier in section C.i. of this
preamble, proposed § 301.6226–3(b)(2)
and (3) was revised in the August 2018
NPRM to reflect the amendments to
section 6226(b) by the TTCA. As
amended, section 6226(b) provides that
when a reviewed year partner takes into
account pushed out adjustments, the
partner’s chapter 1 tax for the reporting
year is adjusted by the amounts the
partner’s chapter 1 tax for the first
affected year or any intervening year
would increase or decrease if the
partner’s share of the adjustments were
taken into account in the first affected
year. As a result, under proposed
§ 301.6226–3(b)(2) and (3) as revised in
the August 2018 NPRM, a correction
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amount and the additional reporting
year tax can be less than zero.
When the partner in the first
hypothetical calculates the correction
amount for the year that was amended,
the partner recomputes its tax for the
year by starting with the amount of tax
shown on the amended return, which
had been based on the full amount of
the adjustment (prior to its reduction by
the court decision). The partner then
determines the amount the partner’s
chapter 1 tax would have increased or
decreased were the reduced adjustment
taken into account for that year. If the
partner’s tax for the amended year
decreases as a result of the reduced
adjustment, that decrease in tax
produces a negative correction amount,
which in turn produces a negative
additional reporting year tax. The
negative additional reporting year tax
would then reduce the partner’s tax for
the reporting year.
The second situation is addressed by
proposed § 301.6226–3(d) as previously
revised in the December 2017 NPRM. As
discussed earlier in this section of the
preamble, proposed § 301.6226–3(d)(2)
provided that each reviewed year
partner calculates its penalty amount by
treating the correction amounts
determined under § 301.6226–3(b) as if
they were underpayments or
understatements for the first affected
year or any intervening year. This rule
is different from the rule initially set
forth in former proposed § 301.6226–
2(f)(3). Under the former rule, to which
the comment’s recommendation related,
each partner was allocated their share of
the penalty that was calculated at the
partnership level. Under the rule in
proposed § 301.6226–3(d), however, a
partner’s penalty calculation is based on
the characteristics of, and facts and
circumstances applicable to, the
reviewed year partner. Accordingly,
while the applicability of the accuracyrelated penalty in the second
hypothetical described by the comment
was determined at the partnership level,
if as a result of taking into account the
adjustments under § 301.6226–3(b), the
tax-exempt entity would not have an
underpayment or understatement for
which a penalty was applicable, the
penalty amount calculated by the taxexempt entity pursuant to § 301.6226–
3(d)(2) would be zero. Whether
modification was requested or approved
with the tax-exempt entity would not
affect this determination.
The same comment also
recommended adding an example to
show the proper application of partner
and partnership-level tax attributes to
the calculation of a correction amount
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for an intervening year. This
recommendation was also not adopted.
Former proposed § 301.6241–1(a)(10)
had defined the term tax attribute to
include both the tax attributes of the
partnership and the tax attributes of its
partners. This definition was changed in
the August 2018 NPRM to remove
references to the partnership or the
partner. This change allows ‘‘tax
attribute’’ to apply to the partnership or
to a partner depending on the particular
context within which it is used. See
section 11.A. of the preamble to the
August 2018 NPRM. As a result, the
definition of tax attribute in proposed
§ 301.6241–1(a)(10), as revised, did not
refer to either the partnership or its
partners.
Former proposed § 301.6226–3(b)(3)
had provided that an intervening year
correction amount was derived by
recomputing a partner’s taxable income
by taking into account any adjustments
to tax attributes. After the change to the
definition to tax attribute, proposed
§ 301.6226–3(b)(3) was revised to make
clear that in the context of calculating
an intervening year correction amount,
it is the ‘‘tax attributes of the partner’’
that are relevant, not the tax attributes
of the partnership. As a result, under
proposed § 301.6226–3(b)(3) as revised
in the August 2018 NPRM, partnershiplevel tax attributes no longer factor into
the calculation of an intervening year
correction amount. See proposed
§ 301.6226–3(h), Example 7; section 4.A.
of the preamble to the August 2018
NPRM. Given these revisions, an
example showing the application of
partnership-level tax attributes would
no longer be accurate for computing an
intervening correction amount under
§ 301.6226–3(b)(3).
The Treasury Department and the IRS
have also declined to add an example
illustrating the application of a partner’s
tax attributes to the calculation of its
correction amount for an intervening
year. Creating an example involving the
tax attributes of a specific partner would
necessitate a description of that
particular partner’s tax profile and
would require a number of assumptions
that would strip the example of its
utility.
Example 5 of proposed § 301.6226–
3(h) described a situation in which the
IRS determines a $200 partnership
adjustment with respect to taxable year
2020 and a resulting $40 imputed
underpayment. During the modification
process, Partner F files amended returns
for 2020, 2021, and 2022 taking into
account F’s share of the $200
partnership adjustment, and the IRS
approves that modification. See
§ 301.6225–2(d)(2). The partnership
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elects to make a push out election with
respect to the $40 imputed
underpayment and furnishes a
statement to F reflecting F’s share of the
$200 partnership adjustment and
reflecting the approval of F’s amended
return modification.
Former proposed § 301.6226–3(g) had
provided that F computes its correction
amounts for the first affected year and
the intervening years and that F
‘‘computes any additional chapter 1 tax
for those years using the returns for
2020, 2021, and 2022 taxable years as
amended during the modification
process.’’ One comment found the
quoted language ambiguous and
recommended the language be revised
to provide that ‘‘F’s computation will
take into account the additional chapter
1 tax that F reported and paid pursuant
to the modification process on amended
returns for the 2020, 2021, and 2022
taxable years.’’ This comment has been
adopted.
Although F takes into account the
chapter 1 tax F reported and paid with
its amended returns, F still must
compute the correction amounts for
each year under § 301.6226–3(b). F
cannot assume F’s additional reporting
year tax is zero because of the fact F
filed an amended return and took into
account the adjustments during the
modification process. For example, F
may have inadvertently taken the
adjustments into account incorrectly
when filing its amended returns or filed
a subsequent amended return, and as a
result F may compute an additional
reporting year tax that is greater than (or
possibly less than) zero when F
performs the calculation under
§ 301.6226–3(b) for the reporting year.
The comment also recommended
changing the language ‘‘[t]he time to file
a petition expires on’’ in Examples 2–4
and 6–9 under proposed § 301.6226–
3(h) to ‘‘[t]he last day to file a petition
is.’’ Under § 301.6226–2(b)(1)(i), if a
petition is not filed under section 6234,
the adjustments become finally
determined upon the expiration of the
time to file a petition under section
6234. Although this is determined in
relation to the last day to file a petition
under section 6234, the language in the
examples mirrors the regulatory
language under § 301.6226–2(b)(1)(i).
Changing the language in the examples
to differ from the language in the rule
could create confusion and ambiguity.
Accordingly, this comment was not
adopted.
Lastly, several comments noted
typographical errors and incorrect crossreferences in the examples under former
proposed § 301.6226–3. These errors
were fixed in proposed § 301.6226–3(h).
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See section 4.B. of the preamble to the
August 2018 NPRM.
5. Administrative Adjustment Requests
Four comments were received
concerning administrative adjustment
requests under section 6227. The
comments addressed the following
topics: (1) The requirement that the
partnership representative must sign an
AAR; (2) the ability to report multiple
imputed underpayments in a single
AAR; (3) the modifications available in
the case of an AAR; (4) how partners
take into account adjustments requested
in an AAR; (5) the availability of the
safe harbor amount; (6) the application
of section 905(c); and (7) how
partnerships that have elected out of the
centralized partnership audit regime file
amended returns. In addition to
addressing the comments, this section of
the preamble explains a change to the
rules regarding whether an AAR is valid
if it fails to include required statements
and interest with respect to imputed
underpayments reported on an AAR.
A. Requirement That the Partnership
Representative Signs an AAR
Proposed § 301.6227–1(c) provided
the form and manner for making an
AAR under the centralized partnership
audit regime, including the rule that an
AAR must be signed under penalties of
perjury by the partnership
representative. One comment
recommended that the regulations
remove the requirement that the
partnership representative sign an AAR
and instead allow any person
authorized to sign the original
partnership return to sign the AAR. This
comment was not adopted.
Under section 6223(b), the
partnership and all partners of such
partnership are bound by actions taken
under the centralized partnership audit
regime by the partnership. See
§ 301.6223–2(a). The filing of an AAR
under section 6227 is an action under
the centralized partnership audit
regime. Under section 6223(a), the
partnership representative has the sole
authority to act on behalf of the
partnership under the centralized
partnership audit regime. Consequently,
only the partnership representative has
the authority to file an AAR under
section 6227, and the final regulations
maintain the requirement that the
partnership representative sign an AAR.
The comment expressed concern that,
in some circumstances, obtaining the
signature of the partnership
representative could be difficult or
impossible. For example, if the
partnership representative is deceased
or where a partnership representative
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whose designation is being revoked
refuses to sign the AAR. The regulations
under section 6223 and 6227
accommodate the concern illustrated in
these examples. Under § 301.6223–
1(e)(2)(ii), a partnership may revoke a
designation of a partnership
representative by filing a valid AAR in
accordance with section 6227. The
revocation must include a designation
of a successor partnership
representative. § 301.6223–1(e)(1). Both
the revocation and the designation are
effective on the date the partnership
files the AAR. § 301.6223–1(e)(3).
Proposed § 301.6227–1(a) provided
that when the partnership changes the
designation of the partnership
representative in conjunction with the
filing of an AAR in accordance with
§ 301.6223–1(e), the change in
designation is treated as occurring prior
to the filing of the AAR. Under this rule,
the prior partnership representative is
revoked and a new partnership
representative is designated prior to the
time the AAR is filed, with the result
that the newly designated partnership
representative is the partnership
representative of record at the time the
AAR is filed. This rule was designed to
address the circumstances described by
the comment when it may be difficult to
obtain the signature of the prior
partnership representative and to make
clear that it is the newly designated
partnership representative that signs an
AAR. Because § 301.6227–1(a), in
connection with the regulations under
section 6223, adequately address the
concerns raised by the comment, the
comment was not adopted.
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B. Multiple Imputed Underpayments
Proposed § 301.6227–1(a) provided
that when filing an AAR, the
partnership must determine whether the
adjustments requested in the AAR result
in an imputed underpayment. Under
proposed § 301.6227–2(a)(1), the
determination of whether adjustments
requested in an AAR result in an
imputed underpayment and the
determination of the amount of the
imputed underpayment is made in
accordance with the rules under
§ 301.6225–1. Generally, a partnership
must pay any imputed underpayment
determined under § 301.6227–2(a)
resulting from the adjustments
requested in an AAR on the date the
partnership files the AAR. Proposed
§ 301.6227–2(b). In lieu of paying the
imputed underpayment under
§ 301.6227–2(b), the partnership may
elect to have each reviewed year partner
take into account the adjustments
requested in the AAR in accordance
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with § 301.6227–3. Proposed
§ 301.6227–2(c).
One comment observed that it was
unclear whether the references to ‘‘an
imputed underpayment’’ in proposed
§ 301.6227–2(a)(1) and to ‘‘the imputed
underpayment’’ in proposed
§ 301.6227–2(c) imply that there can be
only one imputed underpayment in an
AAR, or whether more than one
imputed underpayment can be
calculated in an AAR. The comment
recommended the regulations should
clarify that a single AAR can result in
multiple imputed underpayments, some
of which can be paid while others are
pushed out, and that adjustments that
do not result in an imputed
underpayment can be pushed out.
Neither section 6227 nor the
regulations thereunder prohibit a
partnership from filing multiple AARs
for the same taxable year to request
multiple adjustments to partnershiprelated items. To allow the IRS to
respond to issues that arise in
implementing the new partnership audit
regime, proposed § 301.6227–1(c)
required that an AAR must be filed with
the IRS in accordance with the forms,
instructions, and other guidance
prescribed by the IRS. The current
version of the form prescribed by the
IRS for filing an AAR is not designed to
accommodate the reporting of multiple
imputed underpayments. A partnership
may file multiple AARs to allocate
adjustments into separate imputed
underpayments. For example, the
partnership may file one AAR reporting
an imputed underpayment that the
partnership pays, while filing another
AAR reporting an imputed
underpayment for which the
partnership elects to push out the
adjustments associated with that
imputed underpayment. Accordingly, a
partnership, by filing multiple AARs,
can achieve the result requested by the
comment—that is, the ability to pay an
imputed underpayment with respect to
certain adjustments and push out other
adjustments associated with a different
imputed underpayment.
In response to the comment, the
regulations have been revised to refer to
‘‘an’’ or ‘‘any’’ imputed underpayment,
as appropriate, to accommodate future
cases in which an AAR may result in
more than one imputed underpayment.
In addition, §§ 301.6227–2(c) and
301.6227–3(a) have been revised to
clarify that in the case of an election to
have the reviewed year partners take
into account the adjustments in an AAR,
such partners take into account only
those adjustments that are associated
with the imputed underpayment to
which the election relates.
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Notwithstanding these revisions, the
regulations continue to refer to the form
for filing an AAR and its instructions for
purposes of instructing how a
partnership requests adjustments in an
AAR that result in an imputed
underpayment.
C. Modifications Available in the Case
of an AAR
Proposed § 301.6227–2(a)(2) provided
that a partnership may apply
modifications to the amount of the
imputed underpayment determined
under proposed § 301.6227–2(a)(1)
using only certain, enumerated
modifications as described in proposed
§ 301.6225–2 or as provided in forms,
instructions, or other guidance
prescribed by the IRS with respect to
AARs. A partnership may not modify an
imputed underpayment resulting from
adjustments requested in an AAR except
as described in proposed § 301.6227–
2(a)(2).
Proposed § 301.6225–2(d)(10)
provided a catch-all provision for other
modifications under which a
partnership may request a modification
not described in proposed § 301.6225–
2(d), and the IRS will determine
whether such modification is accurate
and appropriate. Similarly, proposed
§ 301.6225–2(d)(10) provided that
additional types of modifications, and
the documentation necessary to
substantiate such modifications, may be
set forth in forms, instructions, or other
guidance.
One comment suggested that the
regulations should be more flexible
regarding the types of modifications that
are allowed in the case of an AAR.
Specifically, the comment
recommended that proposed
§ 301.6227–2(a)(2) be revised to allow
for the catch-all provision under
proposed § 301.6225–2(d)(10) on the
condition that the IRS approves of the
relevant modification upon review of
the AAR. This comment was not
adopted.
Both proposed § 301.6225–2(d)(10), in
the context of an audit, and proposed
§ 301.6227–2(a)(2), in the context of an
AAR, provide that the IRS may set forth
additional modifications in forms,
instructions, or other guidance. To the
extent the comment was recommending
that adoption of the § 301.6225–2(d)(10)
catch-all provision in § 301.6227–2(a)(2)
would allow the IRS to set forth other
modifications not specifically described
in proposed § 301.6227–2(a)(2), that
ability is already provided for by the
plain language of § 301.6227–2(a)(2).
To the extent the comment was
recommending a rule in which a
partnership could request a
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modification in an AAR on the
condition that modification is only
allowed upon approval by the IRS, the
comment was not adopted. The final
regulations adopt the rule that a
partnership may not modify an imputed
underpayment resulting from
adjustments requested in an AAR except
for the modifications described in
proposed § 301.6227–2(a)(2). Under
proposed § 301.6227–2(a)(2)(i), the
partnership is not required to seek
approval from the IRS prior to applying
modifications to the amount of any AAR
imputed underpayment. This rule
permits a partnership to determine an
imputed underpayment that results
from the adjustments requested in an
AAR and apply modifications when
calculating the amount of the imputed
underpayment the partnership needs to
pay when filing the AAR. The Treasury
Department and the IRS have
determined that this procedure is more
administrable for the IRS and allows
partnerships to more effectively file
AARs and take any adjustments into
account. The partnership does not have
to wait for an IRS determination
regarding specific modifications before
determining the amount of the imputed
underpayment as modified, which
would significantly hamper the AAR
process.
Because the partnership applies
modifications prior to the IRS reviewing
and approving such modifications, the
specifically enumerated modifications
in the regulations are limited to the
types of modifications for which the IRS
already has procedures and systems in
place. This permits the IRS, when it
reviews an AAR, to utilize those
procedures and systems to determine
the accuracy and appropriateness of the
modification that was applied in the
AAR. The limitation on the types of
modifications, in addition to the
detailed information required under
§ 301.6227–2(a)(2)(ii), is designed to
provide partnerships the ability to
reasonably modify an imputed
underpayment resulting from
adjustments requested in an AAR while
not creating undue delay for the
partnership and its partners to take the
adjustments into account. Also, by
providing certainty regarding the
permissible types of modifications, a
partnership will be able to efficiently
use its time and resources in
determining whether it will pay an
imputed underpayment or elect to have
its partners take into account the
adjustments. Finally, as the IRS gains
more experience with modifications in
connection with an AAR under the
centralized partnership audit regime,
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§ 301.6227–2(a)(2) provides the ability
for the IRS to expand the set of allowed
modifications through the use of forms,
instructions, or other guidance.
D. Partners Taking Into Account
Adjustments Requested in an AAR
Former proposed § 301.6227–3
included a reserved paragraph regarding
how a reviewed year partner that is a
pass-through partner takes into account
its share of adjustments requested in an
AAR. In response to the June 2017
NRPM, one comment recommended that
the regulations should allow a passthrough partner to push out its share of
adjustments to the next tier of partners.
The December 2017 NPRM contained
proposed rules under § 301.6227–3
allowing for pass-through partners to
take into account adjustments requested
in an AAR by either making a payment
or pushing out the adjustments to the
next tier of partners, similar to the rules
under proposed § 301.6226–3(e). The
rules under proposed § 301.6227–3 were
further revised in the August 2018
NPRM to reflect the amendments by
section 204 of the TTCA and the
corresponding changes to proposed
§ 301.6226–3(e). See section 5 of the
preamble to the August 2018 NPRM. As
a result, the comment was adopted in
the August 2018 NPRM and is also
included in the final regulations.
Example 2 under proposed
§ 301.6227–3(b)(2), regarding how
partners other than pass-through
partners take into account AAR
adjustments, was revised to remove the
language indicating that the partner may
make a claim for refund with respect to
the overpayment of $25. Instead, the
final regulations provide that the
partner may make a claim for refund
with respect to ‘‘any overpayment.’’
Section 301.6227–3(b)(1) provides that
nothing in the rules under § 301.6227–
3 entitles any partner to a refund of
chapter 1 tax to which such partner is
not entitled. Whether an overpayment
exists is determined under provisions of
the Code and relevant case law outside
the scope of these regulations.
Generally, an overpayment and the
amount of a refund of an overpayment
cannot exceed the amount of tax paid.
See section 6511(b)(2), Jones v. Liberty
Glass, 332 U.S. 524, 531 (1947). No
refund or credit can be made unless it
has first been determined that the
taxpayer has made an overpayment of
tax for the period at issue. Lewis v.
Reynolds, 284 U.S. 281, 283 (1932).
Example 2 was also revised to clarify
that the partner’s chapter 1 tax for 2022
is ¥$25, that is, negative $25. This
change conforms Example 2 to the rules
under § 301.6226–3(b) which allow for
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6521
the additional reporting year tax to
reduce a partner’s chapter 1 tax for the
reporting year.
Finally, minor revisions were made to
clarify that any adjustment that does not
result in an imputed underpayment is
taken into account by reviewed year
partners.
E. Availability of Safe Harbor for
Partners Taking Into Account
Adjustments
The June 2017 NPRM requested
comments on whether the election to
pay a safe harbor amount under former
proposed § 301.6226–3 should be
available in the case of a partner that
must take into account adjustments
requested in an AAR under proposed
§ 301.6227–3. One comment
recommended that the regulations
require a partnership filing an AAR to
calculate a safe harbor amount for each
partner required to take into account the
adjustments requested in the AAR and
include such safe harbor amount in the
statement furnished to the partner.
For the reasons discussed in section 4
of the preamble to the December 2017
NPRM, the safe harbor amount was
removed from the regulations. No
comments were received regarding its
removal, and the final regulations do
not include a safe harbor amount.
Accordingly, this comment was not
adopted.
F. Application of Section 905(c)
One comment recommended rules for
how a partnership subject to the
centralized partnership audit regime can
fulfill the requirements of section
905(c), including the rules relating to
the assessment and collection of interest
on certain refunds of creditable foreign
taxes. The final regulations under
section 6227 do not provide rules
regarding the application of section
905(c), but do include a reserved
paragraph regarding notice of change to
amounts of creditable foreign tax
expenditures. See § 301.6227–1(g). The
recommendations put forth by the
comment remain under consideration.
G. Partnerships That Have Elected Out
of the Centralized Partnership Audit
Regime
One comment suggested that the
regulations address how a partnership
that has a valid election under section
6221(b) in effect for a particular taxable
year should report changes to its
original partnership return from that
year. Section 6227 is the mechanism for
partnerships that are subject to the
centralized partnership audit regime to
file an AAR to correct errors on a
partnership for a prior year. A
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partnership that has made a valid
election under section 6221(b) in
accordance with § 301.6221(b)–1 is not
subject to such regime. Accordingly, a
partnership that has elected out of the
centralized partnership audit regime is
not subject to section 6227 and therefore
does not file an AAR to correct errors on
its original return. The manner in which
a partnership that has elected out
should report changes to its original
return is outside the scope of these
regulations.
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H. Whether an AAR Is Valid Without
Statements
Proposed § 301.6227–1(c)(2) provided
that a valid AAR must include the
adjustments requested, the statements
described in § 301.6227–1(e) if a
reviewed year partner is required to take
into account the adjustments requested,
and other information prescribed by the
IRS in forms, instructions, or other
guidance. The final regulations clarify
that in the case of a failure to provide
the information required under
§ 301.6227–1(c)(2), the IRS may, but is
not required to, invalidate an AAR or
readjust items that were adjusted in the
AAR.
Conversely, the word ‘‘valid’’ was
added to § 301.6227–2(b)(1) to clarify
that only a valid election under
§ 301.6227–2(c) turns off the
partnership’s obligation to pay an
imputed underpayment resulting from
adjustments requested in an AAR.
I. Adjustments That Do Not Result in an
Imputed Underpayment
Under § 301.6225–1(f)(1), two
situations occur where there may be
adjustments that do not result in an
imputed underpayment. Under
§ 301.6225–1(f)(1)(i), a partnership
adjustment does not result in an
imputed underpayment if the result of
netting with respect to any grouping or
subgrouping that includes the particular
partnership adjustment is a net negative
adjustment. Under § 301.6225–1(f)(1)(ii),
a partnership adjustment does not result
in an imputed underpayment if the
calculation under § 301.6225–1(b)(1)
resulted in an amount that is zero or less
than zero. Proposed § 301.6227–3(c)(2)
provided rules regarding how a passthrough partner takes into account
adjustments that do not result in an
imputed underpayment. The proposed
rule was unclear as to whether the rule
applied to both types of situations. The
final regulations under § 301.6227–
3(c)(2) clarify that a pass-through
partner must take into account AAR
adjustments that, with respect to that
pass-through partner, do not result in an
imputed underpayment by furnishing
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statements to its affected partners. This
rule applies to both adjustments that do
not result in an imputed underpayment
pursuant to § 301.6225–1(f)(1)(i) and
adjustments that do not result in an
imputed underpayment pursuant to
§ 301.6225–1(f)(1)(ii). This rule also
applies in situations where the passthrough partner pays an imputed
underpayment. The final regulations
under § 301.6227–1(e)(2) additionally
clarify that when a partnership pays an
imputed underpayment and there are
adjustments that did not result in that
imputed underpayment pursuant to
§ 301.6225–1(f)(1)(i), only the
adjustments that did not result in an
imputed underpayment are to be
included in the statements to its affected
partners.
J. Interest With Respect to an Imputed
Underpayment Resulting From AAR
Adjustments
Proposed § 301.6227–2(b)(2) provided
that interest on an imputed
underpayment resulting from
adjustments requested in an AAR is
determined under chapter 67 of the
Code for the period beginning on the
date after the due date of the
partnership return for the reviewed year
(determined without regard to
extension) and ending on the earlier of
the date payment of the imputed
underpayment is made, or the due date
of the partnership return for the
adjustment year. 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). Proposed § 301.6227–2(b)(2).
To conform the rules under proposed
§ 301.6227–2(b)(2) with the rules under
proposed §§ 301.6232–1(b),
301.6233(a)–1(b), and 301.6233(b)–1(c),
the final regulations provide that
interest on an imputed underpayment
resulting from adjustments requested in
an AAR ends on the date the AAR is
filed. In the case of any failure to pay
an imputed underpayment on the date
the AAR is filed, interest is determined
in accordance with section 6233(b)(2)
and § 301.6233(b)–1(c).
6. Notices of Proceedings and
Adjustments
Former proposed § 301.6231–1(b)(1)
provided that a notice of proposed
partnership adjustment (NOPPA) is
timely if it is mailed before the
expiration of the period for making
adjustments under section 6235(a)(1),
including any extensions of that period
under section 6235(b) and after applying
any of the special rules in section
6235(c). After former proposed
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§ 301.6231–1(b)(1) was issued, section
206(h) of the TTCA amended section
6231(b) to provide that a NOPPA shall
not be mailed later than the date
determined under section 6235(a)(1).
Prior to this amendment, the statute did
not limit the period for the IRS to
propose adjustments under the
centralized partnership audit regime.
Because former proposed § 301.6231–1
comported with the TTCA amendments
to section 6231, former proposed
§ 301.6231–1 was not revised when the
regulations were re-proposed in the
August 2018 NPRM.
One comment received prior to the
issuance of former proposed
§ 301.6231–1 and before the TTCA
amendments to section 6231(b)
recommended that the regulations
clarify that a NOPPA must be issued
within the three-year period specified in
section 6235(a)(1). Because the statute
and the plain language of proposed
§ 301.6231–1 reflect the rule suggested
by this comment, the final regulations
adopt the language of the proposed
regulations without change.
Section 6227(c) provides that a
partnership has three years from the
later of the filing of the partnership
return or the due date of the partnership
return (excluding extensions) to file an
AAR for a taxable year. However, a
partnership may not file an AAR for a
partnership taxable year after the IRS
has mailed a NAP under section 6231
with respect to that taxable year. Section
6227(c); § 301.6227–1(b). Proposed
§ 301.6231–1(f) provided that the IRS
may, without consent of the
partnership, withdraw any NAP or
NOPPA, and any NAP or NOPPA that
has been withdrawn by the IRS has no
effect for purposes of subchapter C of
chapter 63. If the IRS withdraws a NAP
with respect to a partnership taxable
year under proposed § 301.6231–1(f),
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.
One comment stated that the rule
under proposed § 301.6231–1(f) lifting
the prohibition on filing an AAR after a
NAP is meaningless if the three-year
period of limitations under section
6227(c) to file an AAR has already
expired. The comment suggested that
the language in proposed § 301.6231–
1(f) be revised to provide that a NAP
that has been withdrawn by the IRS has
no effect for purposes of subchapter C
or chapter 63 ‘‘except for suspension of
the period of limitations under section
6227 as provided in § 301.6227–1(b).’’
The comment suggested a
corresponding change to proposed
§ 301.6227–1(b) to provide that the
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period of limitations for filing an AAR
is suspended while a NAP is
outstanding. These suggestions have not
been adopted.
First, section 6227 does not authorize
the Treasury Department or the IRS to
suspend the period of limitations within
which a partnership may file an AAR.
By way of contrast, other statutory
provisions within subchapter C of
chapter 63, such as section 6235(b) and
section 6225(c)(7), do provide authority
for the IRS to extend certain time
periods. The absence of similar
authority in section 6227 indicates the
IRS does not have the authority to
suspend the period of limitations under
section 6227(c).
Moreover, because of the required
timing of an examination under the
centralized partnership audit regime, it
is likely that in many cases when a NAP
is withdrawn, there will still be time left
on the period of limitations to file a
timely AAR. In order for a NOPPA to be
timely mailed, it generally must be
issued within three years of the date on
which the partnership return for such
taxable year was filed or the return due
date for the taxable year. Section
6235(a)(1). To allow for sufficient time
to examine the partnership taxable year
and to mail a timely NOPPA, the IRS
will normally mail the NAP early on in
that three-year period.
The period for filing a timely AAR
under section 6227(c) runs concurrently
with the three-year period for mailing a
NOPPA. If after the issuance of the NAP
a partnership finds that it agrees with
the adjustments the IRS has raised with
the partnership during the examination,
the partnership may also find that it is
more efficient for both the partnership
and the IRS to file an AAR, rather than
have those adjustments be made in the
context of the partnership-level exam. In
such a case, the partnership may inform
the IRS of its desire to file an AAR, and
the IRS can determine whether it is
appropriate, in the view of the IRS, to
withdraw the NAP in light of all of the
facts and circumstances. It is incumbent
upon the partnership to inform the IRS
of its desire to file an AAR at the earliest
possible point in the exam to ensure the
NAP can be withdrawn with sufficient
time in the section 6227(c) period to file
an AAR.
Proposed § 301.6231–1(f) provided
that a NAP that has been withdrawn by
the IRS has no effect for purposes of
subchapter C of chapter 63. Under
§ 301.6223–1(d)(2) and (e)(2), however,
if the IRS withdraws a NAP pursuant to
§ 301.6231–1(f), any valid resignation or
revocation of a partnership
representative designation or designated
individual appointment prior to the
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withdrawal of the NAP remains in
effect. To conform these two sets of
rules, the final regulations under
§ 301.6231–1(f) clarify that a withdrawn
NAP has no effect for purposes of
subchapter C of chapter 63 except as
described in § 301.6223–1(d)(2) and
(e)(2).
In addition, proposed § 301.6231–1(f)
was revised to clarify that if the IRS
withdraws a NAP or NOPPA, the NAP
or NOPPA is treated as if it were never
issued, in addition to the NAP or
NOPPA not having any effect for
purposes of subchapter C of chapter 63.
This change conforms the language of
the final regulations under § 301.6231–
1(f) more closely with the language of
section 6227(c).
Lastly, the final regulations under
§ 301.6231–1(f) clarify that the
withdrawal of a NAP or NOPPA
obviates the limitation under
§ 301.6222–1(c)(5) providing that a
partner may not treat an item
inconsistently after a NAP has been
mailed with respect to a partnership
taxable year. This change clarifies that
if the IRS withdraws a NAP, a partner
may treat an item inconsistently from
how the item was treated on the
partnership return after the withdrawal
of the NAP.
7. Assessment, Collection, and Payment
of Imputed Underpayments
Proposed § 301.6232–1(d)(1)(i)
provided that 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 to
comply with section 6222(a), the IRS
has adjusted or will adjust partnershiprelated items to correct the error or to
make the items consistent under section
6222(a) and has assessed or will assess
any imputed underpayment 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, and the limitations under
proposed § 301.6232–1(c) (providing
that generally no assessment can be
made before the mailing of an FPA or,
if applicable, a final court decision) do
not apply to an assessment under
§ 301.6232–1(d)(1)(i). A partnership
generally may request abatement of such
assessments, but abatement is not
available where an adjustment that is
the subject of a notice described in
proposed § 301.6232–1(d)(1)(i) is due to
the failure of a partnership-partner to
comply with section 6222(a). Proposed
§ 301.6232–1(d)(1)(ii).
One comment recommended that the
regulations include a statement that the
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6523
assessment procedures under
§ 301.6232–1(d)(1)(i) will be narrowly
construed and applied. The comment
suggested as an example that the
regulations make clear that an
assessment against a partner of a
partnership-partner will not be treated
as a mathematical or clerical error
where the partner has reported the items
at issue consistently with the
partnership-partner, even though the
partnership-partner may not have been
consistent with the partnership in
which it is a partner. These suggestions
were not adopted.
Nothing in the statute indicates that
section 6232(d) should be construed or
applied to a particular degree. More
specifically, a rule providing that
section 6232(d) will be applied and
construed narrowly would be vague and
not give helpful guidance to taxpayers
or the IRS. For these reasons, the
comment’s suggestion regarding
construing and applying section 6232(d)
narrowly was not adopted, and the
regulations do not include a statement
to that effect.
Regarding the comment’s example of
a rule that might reflect a narrow
construction of the regulations, this
suggestion was also not adopted.
Proposed § 301.6232–1(d)(1)(iii)
provided that in the case of a
partnership-partner that has an election
under section 6221(b) in effect, 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 of the partnership-partner (or
indirect partners of the partnershippartner). 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. Proposed § 301.6232–1(d)(1)(iii).
For all other partnership-partners, the
IRS may assess an imputed
underpayment against such partnershippartner on account of a failure to meet
the consistency requirements under
section 6222(a). See § 301.6232–
1(d)(1)(i). The rule suggested by the
comment thus would apply in the case
of partnership-partners that have an
election under section 6221(b) in effect
and that fail to meet the requirements of
section 6222(a).
Section 6232(d) provides that any
adjustment on account of a failure of a
partnership that is a partner in another
partnership to meet the requirements of
section 6222(a) shall be treated as an
adjustment based on mathematical or
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clerical error, and rules similar to those
under section 6213(b)(1) shall apply. In
the case of partnership-partners that
have an election in effect under section
6221(b), sections 6213 and 6232 allow
the IRS to assess tax against the partners
of such partnership-partner, without
providing for a method to seek
abatement of that assessment. Section
6232(d)(1)(B) provides that any
adjustment on account of a failure by a
partnership-partner to meet the
consistency requirements under section
6222(a) is treated as an adjustment due
to a mathematical or clerical error.
Accordingly, an assessment that follows
any adjustment to the partnershippartner’s return pursuant to section
6232(d) is not subject to the prohibition
under section 6213(a), which would
otherwise require a notice of deficiency
to be mailed to the taxpayer.
Additionally, section 6232(d)(1)(B)
explicitly provides that the provisions
under section 6213(b)(2), permitting
abatement of such assessment, do not
apply. Therefore, the IRS may assess tax
against the partners of a partnershippartner where the partnership-partner
reported inconsistently and has an
election in effect under section 6221(b)
without first having to issue a notice of
deficiency to the partner, and abatement
of the assessment under section
6213(b)(2) is not available. Accordingly,
no changes were made in response to
this comment.
The same comment also suggested
that the regulations explain how a
taxpayer may properly challenge a
mathematical or clerical error
assessment made by the IRS under
proposed § 301.6232–(d)(1)(ii)(B) where
the normal abatement procedures are
unavailable. This comment was not
adopted.
In the case where an imputed
underpayment has been assessed
pursuant to § 301.6232–(d)(1)(ii)(B)
against a partnership-partner that has
not complied with section 6222(a), the
partnership-partner may be able to file
an AAR subsequent to that assessment
in accordance with the provisions of
sections 6222 and 6227. While the AAR
may readjust the partnership-related
items at issue which resulted in the
imputed underpayment, in effect
providing an opportunity to the
partnership to contest the adjustments,
such readjustments would be required
to be taken into account by the
partnership’s partners pursuant to the
rules under section 6227 because the
readjustments would necessarily be
adjustments that would not result in an
imputed underpayment. See
§§ 301.6227–1(a), 301.6227–3(a). Those
readjustments may reduce the partner’s
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tax in the reporting year, but nothing
would give the partnership-partner the
ability to claim a refund of any imputed
underpayment paid. Accordingly, it is
the burden of a partnership-partner to
ensure it has complied with the
provisions of section 6222(a), either by
treating items consistently with the
manner in which they are treated on the
partnership return or by notifying the
IRS of any inconsistency, in order to
preclude an assessment of an imputed
underpayment under section
6232(d)(1)(B).
Under § 301.6232–(d)(1)(ii)(B), a
partnership-partner that has failed to
comply with section 6222(a) may, prior
to assessment, correct an inconsistency
by filing an AAR under section 6227 or
filing an amended partnership return
and furnishing amended statements, as
appropriate. To clarify that an AAR in
such a situation is only permitted to the
extent allowed under section 6227,
including the timing restrictions under
section 6227(c), the final regulations
under § 301.6232–(d)(1)(ii)(B) provide
that the partnership may file an AAR
‘‘in accordance with’’ section 6227.
In the situation where an imputed
underpayment has been assessed
pursuant to § 301.6232–(d)(1)(ii)(B)
against a partnership-partner but such
partnership-partner had in fact
complied with the provisions of section
6222(a), the partnership may be able to
seek a refund of the any imputed
underpayment paid on the ground that
the adjustment should not have been
treated as being on account of
mathematical or clerical error. Any
ability to seek a refund in this situation,
however, is outside the scope of these
regulations. For these reasons, no
changes were made to the regulations
under § 301.6232–1(d) in response to
this comment.
8. Interest and Penalties Related to
Imputed Underpayments
Proposed § 301.6233(a)–1(a) provided
that except to the extent provided in
section 6226(c) and the regulations
thereunder, in the case of a partnership
adjustment for a reviewed year, a
partnership is liable for interest and for
any penalty, addition to tax, or
additional amount as provided in
proposed § 301.6233(a)–1(c). Proposed
§ 301.6233(a)–1(c)(1) provided that in
accordance with section 6221(a), the
applicability of any penalties, additions
to tax, and additional amounts that
relate to a partnership adjustment is
determined at the partnership level as if
the partnership had been an individual
subject to tax imposed by chapter 1 of
the Code for the reviewed year, and the
imputed underpayment were an actual
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underpayment of tax or understatement
for such year. Proposed § 301.6233(a)–
1(c)(2) provided rules that apply in the
case of penalties imposed under
sections 6662, 6662A, and 6663 with
respect to partnership adjustments.
A. Defenses to Penalties
Proposed § 301.6233(a)–1(c)(1)
provided that a partner-level defense (as
described in § 301.6226–3(d)(3)) may
not be raised in a proceeding of the
partnership. As discussed in section
4.C.ii.I of this preamble, one comment
recommended that the regulations
clarify that a partnership that makes a
push-out election will be able to avail
itself of partner-level defenses at the
partnership level. Another comment
recommended that the regulations
should provide a mechanism for
partners to raise partner-level defenses
prior to assessment, rather than
requiring the partner to first pay the
penalty and then file a claim for refund
to raise the partner-level defense. The
comment stated the post-payment
process would be unduly burdensome
on partners and that a pre-payment
process would not impair the audit
process for the IRS. These comments
were not adopted.
Section 6233 provides that penalties
are determined as if the partnership had
been an individual subject to chapter 1
tax for the reviewed year. In
determining whether a penalty applies
during the partnership proceeding,
therefore, it is only the conduct of the
partnership that is relevant. Allowing
the partnership or partners to raise
partner-level defenses and requiring the
IRS to evaluate a partner’s facts and
circumstances during the partnership
proceeding contravenes that purpose of
the centralized partnership audit
regime. Such a rule would also
significantly impair the IRS’s audit
process. As discussed in section 3 of
this preamble regarding the
determination of imputed
underpayments, an examination under
the centralized partnership audit regime
is a centralized proceeding wherein
partner tax attributes are generally
unaccounted for. Requiring the IRS to
evaluate the specific facts and
circumstances of each partner
undermines the centralized nature of
the proceeding and could significantly
delay the examination.
Moreover, section 6233 treats an
imputed underpayment as if it were an
actual underpayment or understatement
for the reviewed year. A partner-level
defense by itself cannot reduce the
amount of an imputed underpayment.
Even if the partner-level defense were
sufficient to provide penalty relief, that
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relief does not affect the amount of the
imputed underpayment. A partner-level
defense can only be relevant in
situations where the imputed
underpayment is reduced because a
partner takes into account the
adjustments that resulted in the
imputed underpayment, for example as
part of modification, or where there is
no partnership-level liability for the
imputed underpayment because of an
election by the partnership under
section 6226 to have its partners take
into account the adjustments. Only
upon taking into account the
adjustments will a partner know the
amount of the penalty the partner is
liable for and therefore whether a
defense to the penalty is needed.
Accordingly, comments suggesting that
the partnership be permitted to raise
partner-level defenses to reduce a
penalty imposed against the partnership
were not adopted. For discussion of
partner-level defenses in the context of
modification and the push out election,
see sections 3.C and 4.C.ii.I of this
preamble.
B. Determining the Portion of the
Imputed Underpayment to Which the
Penalty Applies
Proposed § 301.6233(a)–1(c)(2)(ii)
provided rules for determining the
portion of the imputed underpayment to
which a penalty applies where there
exists (1) 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) at least two
adjustments with respect to which
penalties have been imposed and the
penalties have different rates. In general,
to determine the portion of the imputed
underpayment to which the penalty
applies, all partnership adjustments that
resulted in the imputed underpayment
were grouped together according to
whether they were adjustments with
respect to which a penalty has been
imposed and according to rate of
penalty. The adjustments were then
multiplied by the rate that applied in
calculating the imputed underpayment
and added together to produce the
portion of the imputed underpayment to
which the penalty applies.
One comment observed that under
proposed § 301.6233(a)–1(c)(2)(ii)(D)
and (E) negative or decreasing
adjustments were applied first to
adjustments to which no penalties have
been imposed and then to adjustments
subject to the lowest penalty and
suggested that this rule applies such
adjustments in a manner that maximizes
penalties. The comment recommended
that the proposed regulations be revised
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to group adjustments by character for
purposes of calculating the portion of
the imputed underpayment subject to
the penalty. This comment was partially
adopted.
Section 6233(a)(3) provides that any
penalty, addition to tax, or additional
amount shall be determined at the
partnership level as if such partnership
had been an individual subject to tax
under chapter 1 for the reviewed year
and the imputed underpayment were an
actual underpayment (or
understatement) for such year. Section
6662, which imposes accuracy-related
penalties on underpayments, applies to
the portion of an underpayment
attributable to certain circumstances
such as negligence or disregard of rules
or regulations or a substantial
understatement of income tax. To
determine the portion of an imputed
underpayment to which a penalty
applied, proposed § 301.6233(a)–1(c)
applied rules similar to the ordering
rules under § 1.6664–3 by disregarding
the grouping and subgrouping rules
under § 301.6225–1 and by applying
decreasing adjustments to offset any
positive adjustments to which no
penalty was imposed, followed by
adjustments to which 20 a percent
penalty was imposed, and so forth.
While the rules under proposed
§ 301.6233(a)–1(c) were consistent with
the rules § 1.6664–3, this consistency
did not allow for important distinctions
between the calculation of an
underpayment and the calculation of
the imputed underpayment. For
example, in computing an imputed
underpayment, negative adjustments are
generally not taken into consideration in
determining the imputed underpayment
unless the negative adjustment is in a
grouping or subgrouping under
§ 301.6225–1 that results in a net
positive adjustments because only net
positive adjustments are totaled to
determine the total netted partnership
adjustment, which forms the base for an
imputed underpayment prior to
application of any adjustments to
credits.
Section 301.6233(a)–1(c) has been
revised to account for these distinctions
and to apply the ordering rules under
§ 1.6664–3 within each grouping or
subgrouping determined in accordance
with § 301.6225–1. Because the revised
rule uses the groupings and
subgroupings determined under section
6225, in general the character of the
adjustments within each grouping will
be the same, as suggested by the
comment. See § 301.6225–1(d). The
revised rule maintains the treatment of
an imputed underpayment as if it were
an actual underpayment or
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6525
understatement, but also respects the
framework for calculating the imputed
underpayment established under
section 6225 and the regulations
thereunder. The revised rule is also
more streamlined, removes references to
specific penalty rates to allow for any
future statutory changes, and eliminates
unnecessary steps and terminology. For
example, the revised rule eliminates the
term decreasing adjustment and instead
uses the term ‘‘negative adjustment’’ as
defined in § 301.6225–1(d)(2).
Section 301.6233(a)–1(c)(2) provides
the rules for calculating penalties under
section 6662, 6662A or 6663. Section
301.6233(a)–1(c)(2)(iii) provides the
rules for applying negative adjustments.
As a threshold matter, the rule provides
that adjustments that do not result in an
imputed underpayment and
adjustments that are disregarded in
determining the imputed underpayment
are not taken into account when
determining the amount of penalties.
The rule generally provides that if any
grouping or subgrouping as determined
under § 301.6225–1 or § 301.6225–2
contains a negative adjustment and at
least one positive adjustment subject to
penalty, the negative adjustment is first
used to offset any positive adjustment to
which no penalties have been imposed
within that grouping or subgrouping. If
any amount of negative adjustments
remains after offsetting positive
adjustments to which no penalties have
been imposed, the remaining amount of
negative adjustment is applied within
the grouping or subgrouping against
positive adjustments to which a penalty
has been imposed at the lowest rate. If
after this step, any amount of negative
adjustment remains, the process is
repeated iteratively with respect to
higher rates in ascending order of rate.
Additionally, the regulations provide
special rules for the application of
negative credits. All adjustments to
credits and adjustments treated as
adjustments to credits are treated as
grouped in the credit grouping without
regard to whether the adjustments were
subgrouped for purposes of § 301.6225–
1 (or § 301.6225–2 in the case of
modification). If negative credit
adjustments remain after the application
of negative adjustments in accordance
with § 301.6233(a)–1(c)(2)(iii)(A),
negative credit amounts are first applied
to reduce the portion of the imputed
understatement not subject to penalty
then to reduce the portion of the
imputed understatement subject to
penalty iteratively in ascending order of
rate.
Section 301.6233(a)–1(c)(2)(ii)
provides the mechanical steps for
calculating any penalty after any
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negative adjustments have been applied
in accordance with 301.6233(a)–
1(c)(2)(iii). The steps are applied
separately for each particular penalty
imposed with respect to the
adjustments.
First, all adjustments that are not
adjustments to credits or treated as
adjustments to credits that are subject to
a particular penalty and to which the
highest rate of tax in effect for the
reviewed year under section 1 or 11 was
applied are totaled. Second, the total
from step one is multiplied by the
highest rate of tax in effect for the
reviewed year under section 1 or 11.
Third, the first and second steps are
repeated for any other tax rates used to
calculate the imputed underpayment,
for example, rates applied as part of the
modification process. Fourth, all of the
results from completing the first three
steps are totaled. Fifth, all adjustments
in the credit grouping are netted. The
total from step four is increased by any
remaining positive adjustments to
credits or decreased by negative
adjustments to credits in accordance
with the rules in § 301.6233(a)–
1(c)(2)(iii). This result is the portion of
the imputed underpayment subject to
penalty. Sixth, the total from step five
is multiplied by the penalty rate for the
penalty to provide the total penalty
amount.
C. Interest on Penalties, Additions to
Tax, and Additional Amounts
As discussed earlier in section
4.C.ii.III. of this preamble, one comment
recommended that the regulations adopt
a bifurcated approach under which
interest would run on tax from the due
date of the return without regard to
extensions while interest on penalties
would run from the due date of the
return including any extensions. The
comment recommended that proposed
§ 301.6233(a)–1(b) be revised to provide
that the interest imposed on penalties
and additions to tax (other than
assessable penalties) on an imputed
underpayment begins on the day after
the due date of the partnership return
(including any extensions). This
comment was partially adopted.
Proposed § 301.6233(a)–1(b) provided
rules regarding interest on an imputed
underpayment, but did not provide
rules regarding interest on penalties,
additions to tax, or additional amounts
with respect to the imputed
underpayment. In light of the comment,
the final regulations under
§ 301.6233(a)–1(b) clarify that interest
with respect to penalties, additions to
tax, or additional amounts with respect
to an imputed underpayment
determined under the rules of
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§ 301.6233(a)–1(c) is the interest that
would be imposed under chapter 67 of
the Code treating the partnership return
for the reviewed year as the return of tax
to with respect to which such penalty is
imposed. To the extent the comment
was suggesting a rule that is not
consistent with chapter 67 of the Code,
the comment was not adopted.
9. Judicial Review of Partnership
Adjustments
Section 6234(a) provides that a
partnership may file a petition in the
Tax Court, a United States district court,
or the Court of Federal Claims, within
90 days of the date on which an FPA is
mailed under section 6231. A petition
under section 6234 may be filed in a
district court or the Court of Federal
Claims only if the partnership filing the
petition makes a jurisdictional deposit
in accordance with section 6234(b). The
jurisdictional deposit is 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. See proposed
§ 301.6234–1(b).
Under proposed § 301.6226–1(e), a
partnership that has made an election
under § 301.6226–1 is not precluded
from filing a petition under section
6234(a). One comment stated that the
proposed regulations provided no
explanation as to how or whether the
deposit amount under section 6234(b)
may or should be adjusted to reflect a
push out election under section 6226.
The comment recommended the
regulations should provide a
mechanism that would enable a
partnership to file a petition in a district
court or Court of Federal Claims and
still make an election under section
6226, without creating the risk of having
tax on the partnership adjustments paid
twice. The comment suggested that one
possible approach might be to reduce
the deposit amount by the amount that
would be reported by partners that
receive statements based on an election
under section 6226. The comment
suggested that another approach might
be to provide a clear mechanism for
having the partnership obtain a refund
of the imputed tax deposit before any
amounts are paid by the push out
partners under section 6226.
The comment’s suggestion regarding
whether a partnership can make an
election under section 6226 and also file
a petition under section 6234 is
addressed in section 4.A.v of this
preamble. With respect to the
comment’s suggestion that the
partnership deposit be reduced by the
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amount of the imputed underpayment
that would be reported by partners that
receive 6226 statements, this suggestion
was not adopted. The plain language of
section 6234(b)(1) makes clear that a
petition for readjustment may be filed in
district court or the Court of Federal
Claims only if the partnership makes a
jurisdictional deposit. The statute does
not provide authority to alter this
jurisdictional requirement by regulation
for any partnerships, including
partnerships that make the election
under section 6226. The election under
section 6226 is made with respect to an
imputed underpayment, and therefore
the deposit required under section
6234(b)(1) must equal the entire
imputed underpayment to which the
election relates (in addition to penalties
and interest). An election under section
6226 is not with respect to a portion of
an imputed underpayment; likewise, a
deposit under section 6234(b)(1) cannot
be for a portion of the imputed
underpayment.
Moreover, a rule allowing for a
reduction in the deposit amount for
those partners that are furnished
statements under section 6226 would
not work as a practical matter. First, to
the extent the comment was suggesting
a rule that allows a reduction of the
deposit equal to each partner’s share of
the adjustments, this rule would reduce
the deposit amount to zero, provided all
partners properly were furnished
statements. This would effectively
eliminate the deposit requirement for
partnerships making an election under
section 6226. There is nothing in the
statute that allows any partnership,
including a partnership making the
election under section 6226, to be
exempt from the jurisdictional
requirements of section 6234(b).
Second, to the extent the comment
was suggesting a rule that would reduce
the deposit by the tax paid by partners
furnished statements, this rule would
also not work given the timing of when
statements must be furnished. Pursuant
to § 301.6226–2(b)(1), all statements
must be furnished no later than 60 days
after the date all of the partnership
adjustments to which the statement
relates are finally determined.
Partnership adjustments are finally
determined upon the later of the
expiration of the time to file a petition
under section 6234, or if a petition
under section 6234 is filed, the date
when the court’s decision becomes
final. The deposit under section
6234(b)(1) must be made when a
petition is filed. The deposit cannot be
reduced at the time by the amount the
tax partners will pay because statements
are not furnished until later in the
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process and even then the tax is not
known until the partner files its return
for the reporting year, which depending
on timing of the FPA could be more
than a year after the deadline for
petitioning a court under section
6234(a). For these reasons, the
comment’s suggestion regarding a
reduction in the amount of the deposit
were not adopted, and the regulations
were not changed in response to those
suggestions.
With respect to the comment’s
recommendation that there be a clear
mechanism for having the partnership
obtain a refund of the tax deposit, the
comment’s concern that the deposit
made in conjunction with a section
6226 election would result in double
taxation is misplaced; however, the
regulations were revised to clarify
operation of the deposit rules. Under
§ 301.6234–1(c), the amount deposited
under section 6234(b)(1) is not treated
as a payment of tax (except with respect
to chapter 67 of the Code). If the
partnership makes a valid election
under section 6226, no amount may be
assessed against the partnership, and
instead the partners must take the
adjustments into account. To conform
these two sets of rules, the final
regulations under § 301.6234–1(e)
clarify that a partnership is entitled to
a return of any deposit that is in an
amount in excess of the amount
assessed against the partnership. To
obtain a return of this excess deposit,
the partnership must notify the IRS in
writing in accordance with forms,
instructions, and other guidance
prescribed by the IRS.
10. Definitions and Special Rules
Five comments were received
regarding the definition of pass-through
partner under proposed § 301.6241–1,
the rules regarding cease to exist
determinations in accordance with
proposed § 301.6241–3, and the rules
regarding the nondeductibility of
payments made under the centralized
partnership audit regime as provided in
proposed § 301.6241–4.
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A. Definitions
Proposed § 301.6241–1 defined
certain terms for purposes of the
centralized partnership audit regime.
Proposed § 301.6241(a)(5) defined a
‘‘pass-through partner’’ as ‘‘a passthrough entity that holds an interest in
a partnership’’ and a ‘‘pass-through
entity’’ to include a partnership
described in § 301.7701–2(c)(1), among
other types of entities. A partnership as
described in § 301.7701–2(c)(1) means a
business entity that is not a corporation
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under § 301.7701–2(b) and that has at
least two members.
Section 6241(1) defines the term
partnership to mean any partnership
required to file a return under section
6031(a), which applies to every
partnership as defined in section 761(a).
Certain unincorporated organizations
may elect under section 761(a) to not be
subject to subchapter K. Proposed
§ 301.6241–5(a) provided that an entity
that files a partnership return for any
taxable year is subject to the centralized
partnership audit regime with respect to
such taxable year even if it is
determined that the person filing the
partnership return was not a partnership
for such taxable year. Proposed
§ 301.6241–5(c)(2) provided an
exception from this rule for entities for
which a partnership return was filed for
the sole purpose of making the election
described in section 761(a).
One comment suggested there was an
inconsistency between the definition of
‘‘pass-through partner’’ under proposed
§ 301.6241–1(a)(5), which defines
partnership by reference to § 301.7701–
2(c)(1), and the exception under
proposed § 301.6241–5(c)(2) for entities
that have elected out of subchapter K.
The comment observed that the
definition of partnership under
§ 301.7701–2(c)(1) arguably includes
business organizations that have elected
out of subchapter K under section
761(a). As a result, the term ‘‘passthrough partner’’ would include entities
that may not be partnerships within the
meaning of section 6031(a) because
those entities are required to file
partnership returns. To remedy this
inconsistency, the comment
recommended that the definition of
‘‘pass-through partner’’ in proposed
§ 301.6241–1(a)(5) be revised to
eliminate the reference to § 301.7701–
2(c)(1) and instead refer to the definition
of ‘‘partnership’’ under section 6241(1),
that is, ‘‘a partnership required to file a
return under section 6031(a).’’
The Treasury Department and the IRS
agree with the comment that there was
an inconsistency in the definition of
‘‘pass-through partner.’’ The approach
recommended in the comment was
adopted and remedied this
inconsistency. The revision clarifies that
business organizations that have elected
out of subchapter K are not ‘‘passthrough partners.’’ This change is
consistent with the definition of
‘‘partnership’’ under section 6241(1).
Accordingly, the definition of ‘‘passthrough partner’’ under § 301.6241–
1(a)(5) refers to a partnership that is
required to file a return under section
6031(a), consistent with the definition
of partnership under section 6241(1).
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One comment was received regarding
the application of the centralized
partnership audit regime to passthrough partners as a result of the
proposed regulations. Proposed
§ 301.6226–3 provided that a passthrough partner that is furnished a
statement described in § 301.6226–2
must comply with proposed § 301.6226–
3(e). The term ‘‘pass-through partner’’
includes partnerships that made an
election under section 6221(b) for the
taxable year. One comment suggested
that there may be uncertainty with
respect to how a partnership that has
elected out of the centralized
partnership audit regime complies with
the requirements of the regime. For
example, the elected out partnership
may not have designated a partnership
representative prior to receiving a
statement described in § 301.6226–2.
The comment recommended that the
Treasury Department and the IRS
should issue further guidance on elected
out partnerships, including providing
guidance that confirms an elected out
partnership receiving a statement
described in § 301.6226–2 and
complying with § 301.6226–3(e) will not
be deemed subject to the centralized
partnership audit regime for other
purposes.
A partnership that has made an
election under section 6221(b) is not
subject to the requirements of the
centralized partnership audit regime as
a partnership. For example, the
partnership is not required to select a
partnership representative. A
partnership that has made an election
under section 6221(b) may still be
subject to the requirements of the
centralized partnership audit regime in
its capacity as a partner in a partnership
that is subject to the centralized
partnership audit regime. For example,
sections 6222, 6223, 6226(b)(4)(C),
6241(7), and the regulations thereunder
apply to all partners in a partnership
subject to the centralized partnership
audit regime, including any passthrough partner. Pass-through partners
that must comply with these provisions
include partnerships subject to the
centralized partnership audit regime as
partnerships as well as those that made
an election under 6221(b) and other
entities such as S corporations and
trusts.
For example, under § 301.6226–3(e) a
pass-through partner that receives a
push out statement from an audited
partnership must furnish statements to
its owners or, if it fails to furnish
statements to its owners, pay an
imputed underpayment. This rule
applies regardless of whether or not the
pass-through partner is subject to the
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centralized partnership audit regime in
its capacity as a partnership. Nothing in
proposed § 301.6226–3(e) indicated that
a pass-through partner not otherwise
subject to the centralized partnership
audit regime becomes subject to other
provisions of the regime simply because
it must comply with § 301.6226–3(e) in
its capacity as a partner. Therefore, the
Treasury Department and the IRS have
declined to provide further guidance
regarding the application of the
centralized partnership audit regime to
partnerships that have made an election
out of the centralized partnership audit
regime under section 6221(b).
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B. Treatment Where a Partnership
Ceases To Exist
Several comments were received
regarding the treatment of partnership
adjustments where a partnership ceases
to exist under section 6241(7). The
comments pertained to two general
areas: (1) The determination that a
partnership has ceased to exist; and (2)
the definition of ‘‘former partners’’
under proposed § 301.6241–3(d).
i. Determination That Partnership Has
Ceased To Exist
Proposed § 301.6241–3 provided that,
if the IRS determined a partnership
ceased to exist (as described in
proposed § 301.6241–3(b)(2)) before the
partnership adjustments take effect (as
described in proposed § 301.6241–3(c)),
the partnership adjustments are taken
into account by the former partners (as
described in proposed § 301.6241–3(d))
in accordance with proposed
§ 301.6241–3(e). Proposed § 301.6241–
3(b)(1) provided that a determination
that a partnership had ceased to exist
was within the sole discretion of the
IRS, and the IRS was not required to
determine that a partnership has ceased
to exist, even if the partnership meets
the definition of cease to exist in
proposed § 301.6241–3(b)(2).
One comment stated that the language
in proposed § 301.6241–3(b)(1) and (2)
was ambiguous and allowed for
excessive latitude and a potential for
abuse of discretion in making such a
cease-to-exist determination. The
comment suggested that the IRS, upon
formal request, should be compelled to
consider the facts and circumstances of
a cease-to-exist determination.
If the IRS receives a letter requesting
that the IRS determine that a specific
partnership has ceased to exist and
providing detailed facts to support such
a determination, the IRS will consider
the circumstances in the letter and
whether it is in the interest of sound tax
administration to determine that the
partnership has ceased to exist. The IRS,
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however, will retain its discretion as to
whether to determine that a partnership
has ceased to exist, even if the facts
would indicate that the partnership
meets the criteria in § 301.6241–
3(b)(1)(i) and (ii). The cease-to-exist
rules are inherently related to collection
issues with respect to amounts not paid
as a result of an administrative
proceeding under the centralized
partnership audit regime. Where a
taxpayer or partnership properly owes
amounts to the U.S. government, the IRS
should be provided broad latitude,
within the statutory limits, to ensure
that such amounts are ultimately
collected. To that end, it is
administratively necessary for the IRS to
retain its discretion to make a
determination about whether a
partnership ceases to exist. Cease to
exist is not the only collection tool
available to the IRS. The Treasury
Department and the IRS therefore
decline to create an additional
unnecessary administrative rule that
would compel the IRS to make a
determination if requested by a
taxpayer. Accordingly, no changes were
made to the final regulations as a result
of this comment.
Although the regulations do not
require the IRS to make a cease-to-exist
determination upon a formal request,
the regulations have been revised to
provide that a partnership does not
cease to exist for purposes of section
6241(7) without the IRS determining the
partnership has ceased to exist. Under
proposed § 301.6241–3(b), cease to exist
was defined as a situation where the
partnership terminates under section
708(b)(1) or is unable to pay, in full, any
amount due under subchapter C of
chapter 63. It was not clear from the
proposed regulations whether a
partnership meeting those criteria could
cease to exist without an accompanying
determination to that effect by the IRS.
The final regulations under § 301.6241–
3(b) make clear that a partnership ceases
to exist if the partnership terminates
within the meaning of section 708(b)(1)
or the partnership does not have the
ability to pay, in full, any amount due
under subchapter C of chapter 63, but
only if the IRS makes a determination
that the partnership has ceased to exist
under one of those two situations. The
final regulations provide certainty to
both taxpayers and the IRS about when
a partnership ceases to exist and make
the cease-to-exist rules more
administrable for the IRS by eliminating
any confusion about whether a
partnership has ceased to exist.
Proposed § 301.6241–3(b)(1) provided
that if the IRS determines that a
partnership ceased to exist, the IRS will
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notify the partnership and its former
partners within 30 days of such
determination. The final regulations
clarify that a failure by the IRS to send
a notification required under
§ 301.6241–3(b)(1) to the former
partners of the partnership does not
invalidate a determination that the
partnership has ceased to exist. In
addition, one comment suggested that
the IRS should also notify the
partnership representative (and
designated individual, if applicable). To
the extent the comment is referring to
the partnership representative of the
audited partnership, the comment has
been adopted. In the case of a
determination that the partnership has
ceased to exist, the IRS will notify the
partnership, the former partners of the
partnership, and when an audited
partnership has ceased to exit, the
partnership representative (and
designated individual, if applicable) for
the reviewed year. This rule is
consistent with the other notification
provisions throughout the centralized
partnership audit regime, which provide
notification to the partnership
representative and designated
individual, if applicable. To the extent
the comment was referring to a
partnership that received a push out
statement, the comment was not
adopted. The partnership representative
from the reviewed year or any other year
of a partnership that received a push out
statement has no connection to the
unpaid, current liability and notification
would not be appropriate or necessarily
beneficial to the partnership. In
addition, there would be administrative
complexity for the IRS in determining
the appropriate partnership
representative for a partnership partner
to notify because the IRS will only have
been in contact with the partnership
representative of the audited
partnership, not partnership
representatives of other partnerships not
subject to an administrative proceeding.
The same comment also suggested
that the partnership should be allowed
to appeal a determination that the
partnership has ceased to exist to the
IRS Office of Appeals within 60 days of
the receipt of the IRS’s determination
that the partnership has ceased to exist.
This comment was not adopted. As
discussed in section 11 of this Summary
of Comments and Explanation of
Revisions, any guidance regarding the
availability of review by the IRS Office
of Appeals will be provided outside of
these regulations to preserve flexibility
and allow the IRS to revise its
procedures as it gains experience with
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the centralized partnership audit
regime.
Former proposed § 301.6241–
3(b)(2)(iii) had provided that the IRS
could not determine that a partnership
ceased to exist with respect to a
partnership adjustment after the
expiration of the period of limitations
on collection applicable to the amount
due resulting from such adjustment.
One comment observed that the
reference to the ‘‘period of limitations
on collection applicable to the amount
due’’ did not specify whether the period
of limitations related to the partnership
or the partner. In the August 2018
NPRM, former proposed § 301.6241–
3(b)(2)(iii) was revised to provide that
the relevant period of limitations is the
period of limitations on collection
applicable to the assessment made
against the partnership for the amount
due resulting from such adjustment.
Because the plain language of proposed
§ 301.6241–3(b)(2)(iii) resolves the
ambiguity identified by the comment,
no further changes were made in the
final regulations in response to this
comment.
ii. Definition of Former Partners
Proposed § 301.6241–3(d) defined the
term ‘‘former partners’’ as the
adjustment year partners of the
partnership that ceased to exist, unless
there are no adjustment year partners in
which case the former partners are 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. If the
IRS determined that the partnership
ceased to exist prior to the partnership
adjustments taking effect, the former
partners of the partnership take into
account the partnership adjustments as
if the partnership had made an election
under section 6226 to push out the
adjustments to the former partners. See
proposed § 301.6241–3(e).
One comment expressed concern that,
once a partnership was placed under
examination, the partners could transfer
their partnership interests to defunct
corporations or otherwise uncollectible
entities such that the IRS would be
unable to collect from the ‘‘former
partners’’ under the provisions of
proposed § 301.6241–3. Similarly, the
comment expressed concern that if the
partnership was able to pay some but
not all of the amounts due under the
centralized partnership audit regime
and the IRS did not determine that the
partnership had ceased to exist, the
partners would benefit from the
improper treatment of the items and the
partnership will not have paid the
amounts owed as a result of the
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adjustments. The comment suggested
that the final regulations add the ability
for the IRS to assess the transferees of
the former partners and the owners of
the partnership.
Under section 6232(f), as added by the
TTCA after the comment was received,
if the partnership does not pay any
amount of the imputed underpayment
or specified similar amount (as defined
in section 6232(f)(2)) within 10 days
after the date on which the IRS provides
notice and demand for such payment,
the IRS may assess upon each partner of
the partnership (as of the close of the
adjustment year) or, if the partnership
has ceased to exist, the former partners
of the partnership, a tax equal to such
partner’s proportionate share of such
amount (including any penalties and
interest). Section 6232(f) provides the
IRS with the ability to directly make
assessments against the partners of a
partnership that fails to pay an imputed
underpayment or specified similar
amount much like the assessment
authority suggested by the comment. In
addition, nothing in proposed
§ 301.6241–3 limits or otherwise
modifies the IRS’s existing tools under
the Code, related case law, or any other
law with respect to transferee liability.
Accordingly, no changes were made to
the final regulations in response to this
comment. For these reasons, the
clarification recommended by the
comment was not adopted.
Another comment suggested that the
definition of ‘‘former partners’’ under
proposed § 301.6241–3(d) should
include the reviewed year partners of
the partnership that has ceased to exist
in situations where the partnership has
made an election under section 6226.
Proposed § 301.6241–3(b)(2)(i)(A)
provided that the IRS may not
determine that a partnership has ceased
to exist solely because the partnership
has a valid election under section 6226
in effect with respect to any imputed
underpayment. If the partnership makes
a valid election under section 6226, the
partnership is not liable for the imputed
underpayment to which the election
relates. See section 6226(a) and
§ 301.6226–1(b)(2). As a result, the IRS
cannot determine the partnership ceases
to exist with respect to that imputed
underpayment (see § 301.6241–3(b)(2)),
and the cease to exist provisions under
proposed § 301.6241–3 will not apply to
such partnership with respect to that
imputed underpayment. Therefore, this
comment was not adopted.
Although this comment was not
adopted, a clarification was made to the
definition of ‘‘former partners’’ under
proposed § 301.6241–3(d)(1)(i). As
stated earlier in this section of the
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6529
preamble, the term ‘‘former partners’’
was defined under proposed
§ 301.6241–3(d)(1)(i) as the partners for
the adjustment year that corresponds to
the partnership taxable year to which
the partnership adjustment relates. The
final regulations under § 301.6241–
3(d)(1)(i) clarify that the term ‘‘former
partners’’ means, for a partnership that
has ceased to exist, the partners of the
partnership during the adjustment year
(as defined in § 301.6241–1(a)(2)) that
corresponds to the reviewed year for
which the adjustments were made.
C. Payments Nondeductible
Proposed § 301.6241–4 provided that
no deduction is allowed under subtitle
A of the Code for any payment required
to be made by a partnership under the
centralized partnership audit regime,
which includes any imputed
underpayment or any interest, penalties,
additions to tax, or additional amounts
with respect to an imputed
underpayment. Former proposed
§ 301.6225–1(a) provided that a
partnership’s expenditure for the
imputed underpayment ‘‘and the
adjustments that result in the imputed
underpayment’’ are taken into account
by the partnership in accordance with
§ 301.6241–4.’’ One comment suggested
that, because of the cross reference to
§ 301.6241–4 in former proposed
§ 301.6225–1(a), that the regulations
under § 301.6241–4 be revised to
address the treatment of the adjustments
that result in the imputed
underpayment. This comment was not
adopted.
Proposed § 301.6241–4 addressed the
deductibility of payments required
under the centralized partnership audit
regime and did not address the
treatment of adjustments that were
taken into account in determining the
amount of such payments. In the August
2018 NPRM, former proposed
§ 301.6225–1(a) was revised to remove
the erroneous cross-reference to the
adjustments being taken into account
under § 301.6241–4. To the extent the
comment was recommending that
revision, the comment was addressed by
the revisions in the August 2018 NPRM.
To the extent the comment was
recommending guidance on the
treatment of partnership adjustments in
the context of adjusting tax attributes,
those rules were provided in proposed
§§ 301.6225–4 and 301.6226–4.
D. Extension to Entities Filing
Partnership Returns
Proposed § 301.6241–5(c)(2) provided
that the centralized partnership audit
regime would not apply to a taxable
year for which a partnership return was
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filed for the sole purpose of making an
election described in section 761(a)
(regarding election out of subchapter K
for certain unincorporated
organizations). The final regulations
under § 301.6241–5(c)(2) retain this rule
but clarify that the centralized
partnership audit regime will not apply
to a taxable year in which a valid
section 761(a) election is made. This
change was made to clarify that the
election under section 761(a) must be
valid in order for the rules under
§ 301.6241–5 not to apply to a
partnership return that is filed with
respect to a taxable year.
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11. Comments Concerning IRS Appeals
Office
Several comments were received
regarding the interaction between the
centralized partnership audit regime
and the IRS Appeals. For example,
certain comments suggested the
regulations clarify the rules regarding a
partnership’s ability to raise various
issues and determinations with IRS
Appeals, including the timing of any
involvement by IRS Appeals.
Procedures governing IRS Appeals are
beyond the scope of these regulations.
Accordingly, except as described in
sections 3.B.i., 3.B.vii., 4.B.v., and
10.B.i. of this preamble, neither this
preamble nor the regulations address
IRS Appeals procedures in the context
of the centralized partnership audit
regime. These procedures are expected
to be addressed in future guidance.
12. Effect of Provisions Enacted Under
the Tax Cuts and Jobs Act
One comment suggested that the final
regulations include guidance on the
effect of the new partnership-related
provisions of the Tax Cuts and Jobs Act,
formally known as ‘‘An Act to provide
for reconciliation pursuant to titles II
and V of the concurrent resolution on
the budget for fiscal year 2018,’’ Public
Law 115–97 (TCJA), including examples
of how adjustments to partnershiprelated items and tax attributes specific
to the new TCJA provisions are treated
under sections 6225 and 6226 by
partnerships and their partners.
The Treasury Department and the IRS
have determined not to provide
guidance on how the provisions of the
TCJA, including any partnership-related
provisions, interact with the centralized
partnership audit regime. The TCJA
provisions are substantive tax rules that
work independently of the procedural
rules of the centralized partnership
audit regime. Therefore, no change
would necessarily be required as a
result of these substantive provisions.
However, as the Treasury Department
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and the IRS continue to gain experience
with the centralized partnership audit
regime and implement rules under the
new TCJA provisions, guidance will be
issued if it is later determined that
doing so would be appropriate. For
these reasons, this comment was not
adopted.
Department and the IRS participated in
their development.
13. Effective Date of Centralized
Partnership Audit Regime
Several comments recommended that
the effective date of the centralized
partnership audit regime be delayed.
These comments were not adopted
because the effective date for the
statutory provisions governing the
centralized partnership audit regime is
established by statute. See BBA section
1101(g).
Amendments to the Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
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 Treasury Department
and the Office of Management and
Budget regarding review of tax
regulations. Therefore, a regulatory
impact assessment is not required.
Because the final 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, the notice of proposed rulemaking
preceding these regulations was
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business, and no
comments were received.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, Notices and other guidance
cited in this preamble are published in
the Internal Revenue Bulletin (or
Cumulative Bulletin) and are available
from the Superintendent of Documents,
U.S. Government Publishing Office,
Washington, DC 20402, or by visiting
the IRS website at www.irs.gov.
Drafting Information
The principal authors of these final
regulations are Jennifer M. Black of the
Office of the Associate Chief Counsel
(Procedure and Administration), Steven
L. Karon of the Office of the Associate
Chief Counsel (Procedure and
Administration), and Joy E. Gerdy
Zogby of the Office of the Associate
Chief Counsel (Procedure and
Administration). However, other
personnel from the Treasury
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List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes,
Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation
for part 301 is amended by adding
entries for §§ 301.6221(a)–1, 301.6222–
1, 301.6225–1, 301.6225–2, 301.6225–3,
301.6226–1, 301.6226–2, 301.6226–3,
301.6227–1, 301.6227–2, 301.6227–3,
301.6231–1, 301.6232–1, 301.6233(a)–1,
301.6233(b)–1, 301.6234–1, 301.6235–1,
301.6241–1, 301.6241–2, 301.6241–3,
301.6241–4, 301.6241–5, and 301.6241–
6 in numerical order to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Section 301.6221(a)–1 also issued under 26
U.S.C. 6221.
Section 301.6222–1 also issued under 26
U.S.C. 6222 and 6223.
*
*
*
*
*
Section 301.6225–1 also issued under 26
U.S.C. 6225.
Section 301.6225–2 also issued under 26
U.S.C. 6223 and 6225.
Section 301.6225–3 also issued under 26
U.S.C. 6225.
*
*
*
*
*
Section 301.6226–1 also issued under 26
U.S.C. 6223 and 6226.
Section 301.6226–2 also issued under 26
U.S.C. 6226.
Section 301.6226–3 also issued under 26
U.S.C. 6226.
*
*
*
*
*
Section 301.6227–1 also issued under 26
U.S.C. 6223 and 6227.
Section 301.6227–2 also issued under 26
U.S.C. 6227.
Section 301.6227–3 also issued under 26
U.S.C. 6227.
*
*
*
*
*
Section 301.6231–1 also issued under 26
U.S.C. 6231.
*
*
*
*
*
Section 301.6232–1 also issued under 26
U.S.C. 6232.
*
*
*
*
*
Section 301.6233(a)–1 also issued under 26
U.S.C. 6233.
Section 301.6233(b)–1 also issued under 26
U.S.C. 6233.
Section 301.6234–1 also issued under 26
U.S.C. 6234.
Section 301.6235–1 also issued under 26
U.S.C. 6235.
Section 301.6241–1 also issued under 26
U.S.C. 6241.
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Section 301.6241–2 also issued under 26
U.S.C. 6241.
Section 301.6241–3 also issued under 26
U.S.C. 6241.
Section 301.6241–4 also issued under 26
U.S.C. 6241.
Section 301.6241–5 also issued under 26
U.S.C. 6241.
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Section 301.6241–6 also issued under 26
U.S.C. 6241.
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Par. 2. Section 301.6221(a)–1 is added
to read as follows:
■
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§ 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 in this part, any adjustment
to a partnership-related item (as defined
in § 301.6241–1(a)(6)(ii)) is determined,
any tax imposed by chapter 1 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.
(b) Legal and factual determinations
at the partnership level. Except as
otherwise provided under subchapter C
of chapter 63, any legal or factual
determinations underlying any
adjustment or determination made in
accordance with paragraph (a) of this
section are also determined at the
partnership level under subchapter C of
chapter 63. For instance, determinations
under this paragraph (b) include any
determinations necessary to calculate
the imputed underpayment or any
modification of the imputed
underpayment under section 6225 and
the period of limitations on making
adjustments under subchapter C of
chapter 63.
(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, and ending
after August 12, 2018.
(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. 3. 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
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general. The treatment of partnershiprelated items (as defined in § 301.6241–
1(a)(6)(ii)) 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
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. For purposes of this section, the
term partner’s return includes any
return, statement, schedule, or list, and
any amendment or supplement thereto,
filed by the partner with respect to any
tax imposed by the Internal Revenue
Code (Code).
(2) Partner that is a partnership with
an election in effect under section
6221(b). The rules of this section apply
to all partners, including a partnershippartner (as defined in § 301.6241–
1(a)(7)) that has an election in effect
under section 6221(b) for any taxable
year. 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.
(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 Internal Revenue
Service (IRS) under section 6031, and
any amendment or supplement thereto,
including an administrative adjustment
request (AAR) filed pursuant to section
6227; 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 IRS,
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including any statements filed pursuant
to section 6226.
(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 of the
Code (subchapter C of chapter 63), and
each partnership and its partners are
calendar year taxpayers, unless
otherwise stated.
(i) Example 1. A is a partner in Partnership
during 2018 and 2019. 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. A includes its distributive
share of income from the advance payment
on A’s income tax return for 2019 and not on
A’s income tax return for 2018. A has not
satisfied the requirements of paragraph (a) of
this section because A’s treatment of the
income attributable to Partnership is
inconsistent with the treatment of that item
by Partnership on its partnership return.
(ii) Example 2. B 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. B deducted his
distributive share of the start-up costs on B’s
2018 income tax return. B has not satisfied
the requirements of paragraph (a) of this
section because B’s treatment of the start-up
costs is inconsistent with the treatment of
that item by Partnership on its partnership
return.
(iii) Example 3. C 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 C’s distributive share of that loss.
On the 2018 Schedule K–1 furnished to C,
however, Partnership reports $15,000 as C’s
distributive share of the loss. C reports the
$15,000 loss on C’s 2018 income tax return.
C has not satisfied the requirements of
paragraph (a) of this section because C
reported C’s distributive share of the loss in
a manner that is inconsistent with how C’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.
(iv) 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,
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. D has not
satisfied the requirements of paragraph (a) of
this section because D has not taken into
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account his share of the loss in a manner
consistent with how Partnership treated such
items on the partnership return actually filed.
(v) Example 5. E was a partner in
Partnership during 2018. In 2021,
Partnership receives a notice of final
partnership adjustment (FPA) in an
administrative proceeding under subchapter
C of chapter 63 with respect to Partnership’s
2018 taxable year. The FPA reflects an
imputed underpayment. Partnership properly
elects the application of section 6226 with
respect to the imputed underpayment and
files with the IRS 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. 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 section 6226 statement filed with the IRS.
(vi) Example 6. F was a partner in
Partnership during 2018. F has a valid
election under section 6221(b) in effect with
respect to F’s 2018 partnership taxable year.
Notwithstanding F’s election under section
6221(b) for its 2018 taxable year, F is subject
to section 6222 for taxable year 2018. F must
treat, on its 2018 partnership return, any
items attributable to F’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.
(vii) Example 7. G was a partner in
Partnership during 2018. G’s taxable year
ends on the same day as Partnership’s 2018
taxable year. Partnership did not file a
partnership return for its 2018 taxable year.
G files an income tax return for its 2018
taxable year and reports G’s share of a loss
attributable to G’s interest in Partnership.
Because Partnership failed to file a
partnership return, G’s treatment of such loss
is per se inconsistent pursuant to paragraph
(a)(3) of this section.
(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 (or
where no partnership return was filed,
remove any treatment of such items
from the partner’s return) and determine
any underpayment of tax that results
from that adjustment. For purposes of
this section, except as provided in
paragraph (b)(3) 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.
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(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 were 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. For the effect of a failure to
satisfy the requirements of paragraph (a)
of this section where the partner is itself
a partnership (a partnership-partner),
see section 6232(d)(1)(B) and
§ 301.6232–1(d).
(4) Examples. The following examples
illustrate the rules of this paragraph (b).
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.
(i) Example 1. H, an individual, is a
partner in Partnership. On its partnership
return for taxable year 2018, Partnership
reports $100,000 in ordinary income. On the
Schedule K–1 attached to the partnership
return, as well as on the Schedule K–1
furnished to H, Partnership reports $15,000
as H’s distributive share of the $100,000 in
ordinary income. H 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 H’s
interest in Partnership reported on H’s 2018
income tax return from $5,000 to $15,000 and
assess that resulting underpayment in tax as
if it were on account of a mathematical or
clerical error appearing on H’s return. H may
not request an abatement of that assessment
under section 6213(b).
(ii) Example 2. J was a partner in
Partnership during 2018. In 2021,
Partnership receives an FPA in an
administrative proceeding under subchapter
C of chapter 63 with respect to Partnership’s
2018 taxable year. The FPA reflects an
imputed underpayment. Partnership properly
elects the application of section 6226 with
respect to the imputed underpayment and
files with the IRS and furnishes to J a
statement of J’s share of adjustments with
respect to Partnership’s 2018 taxable year. J
fails to report one adjustment reflected on the
statement, J’s share of a decrease in the
amount of losses for 2018, on J’s return as
required by section 6226. The IRS may
determine the amount of tax that results from
adjusting the decrease in the amount of
losses on J’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
were on account of a mathematical or clerical
error appearing on J’s return. J may not
request an abatement of that assessment
under section 6213(b).
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(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. For instance, 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 a statement described in
§ 301.6226–2 filed by the partnership
with the IRS. See § 301.6226–1(e)
(regarding the binding nature of
statements described in § 301.6226–2).
Any underpayment resulting from the
inconsistent treatment of an item
described in this paragraph (c)(2) 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
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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. If the IRS conducts a
proceeding with respect to the
partnership regarding the identified,
inconsistently reported item, each
partner of the partnership, including
any partner that notified the IRS of
inconsistent treatment in accordance
with paragraph (c)(1) of this section, is
bound by actions taken by the
partnership and by any final decision in
the proceeding with respect to the
partnership. See paragraph (c)(2) of this
section.
(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
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) Limitation on treating partnershiprelated items inconsistently after notice
of administrative proceeding. After a
notice of administrative proceeding
with respect to a partnership taxable
year has been mailed by the IRS under
section 6231, a partner may not notify
the IRS the partner is treating a
partnership-related item on the partner’s
return inconsistently with how such
item was treated on the partnership
return for such taxable year, except as
provided in § 301.6225–2.
(6) 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.
(i) Example 1. K is a partner in Partnership
during 2018. K treats a deduction and a
capital gain attributable to Partnership on K’s
2018 income tax return in a manner that is
inconsistent with the treatment of those
items by Partnership on its 2018 partnership
return. K reports the inconsistent treatment
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of the deduction in accordance with
paragraph (c)(1) of this section, but not the
inconsistent treatment of the gain. Because K
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 K’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 were
on account of a mathematical or clerical error
appearing on K’s return.
(ii) Example 2. L is a partner in
Partnership during 2018. On its 2018
partnership return, Partnership treats partner
L’s distributive share of ordinary loss
attributable to Partnership as $8,000. L,
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 L’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 L’s distributive share of the
ordinary loss from Partnership is $3,000.
During the same proceeding, the IRS also
determines that L overstated a charitable
contribution deduction in the amount of
$2,500 on its 2018 income tax return. The
determination of the adjustment of L’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 L’s partner return, to
$8,000, as originally reported by Partnership
on its partnership return, nor is the IRS
prohibited from adjusting the charitable
contribution deduction in the proceeding
with respect to L.
(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.
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(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. M is a partner in
Partnership for 2018. Partnership is
subject to subchapter C of chapter 63,
and both Partnership and M are
calendar year taxpayers. On its 2018
partnership return, Partnership reports
that M’s distributive share of ordinary
income attributable to Partnership is
$1,000. Partnership furnishes to M a
Schedule K–1 for 2018 showing $500 as
M’s distributive share of ordinary
income. M reports $500 of ordinary
income attributable to Partnership on its
2018 income tax return consistent with
the Schedule K–1 furnished to M. The
IRS notifies M that M’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 M on its 2018 partnership
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return. Within 60 days of receiving the
notice from the IRS of the inconsistency,
M files an election with the IRS in
accordance with paragraph (d)(2) of this
section. Because M made a valid
election under section 6222(c)(2)(B) and
paragraph (d)(1) of this section, M 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, and ending
after August 12, 2018.
(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. 4. Section 301.6225–1 is added to
read as follows:
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§ 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
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
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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 for 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
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 as net
positive adjustments (as defined in
paragraph (e)(4)(i) of this section) under
paragraph (e)(3)(ii) of this section; and
(B) Except as provided in paragraph
(e)(3)(ii) of this section, any amounts
treated as net negative adjustments (as
defined in paragraph (e)(4)(ii) of this
section) under paragraph (e)(3)(ii) of this
section.
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(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 of the Internal Revenue Code. A
partnership adjustment is disregarded
for purposes of calculating the imputed
underpayment under paragraph (b) 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 § 301.6241–6(b)(2)(ii) and
(iii)) that is attributable to the
partnership adjustment. See § 301.6241–
6(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
§ 301.6241–6(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 one
partnership adjustment is reflected in
one or more other partnership
adjustments, the IRS may treat the one
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 § 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
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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
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
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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
adjustment and one negative
adjustment.
(d) Subgroupings—(1) In general. If all
partnership adjustments are positive
adjustments, this paragraph (d) does not
apply. 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). 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).
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(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, to the extent
appropriate, either as a positive
adjustment to income or to a credit.
(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, regulations, forms,
instructions, or other guidance
prescribed by the IRS applicable to the
adjusted partnership-related item. A
negative adjustment 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), other provision of the
Code, regulations, forms, instructions,
or other guidance prescribed by the IRS.
For purposes of creating subgroupings
under this section, if any adjustment
could be subject to any preference,
limitation, or restriction under the Code
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(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.
(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.
Notwithstanding the requirement that
reallocation adjustments be placed into
separate subgroupings, 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 adjustment. 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 paragraphs (d)(3)(i) and (iii) of this
section. For rules related to creditable
expenditures other than CFTEs, see
paragraph (d)(3)(iii)(C) of this section.
(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 in part 1 of
this chapter, and to account for any
different allocation of the CFTE between
partners. Two or more adjustments to
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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) [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 in accordance with
paragraph (c) of this section. If a
negative adjustment is in a subgrouping
in accordance with paragraph (d) of this
section, the negative adjustment may
only net with a positive adjustment also
in that same subgrouping in accordance
with paragraph (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
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(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 described in
this paragraph (e)(3)(ii) is taken into
account under paragraph (b)(1)(v) of this
section. A net negative adjustment
described in this paragraph (e)(3)(ii),
including a negative adjustment to a
credit resulting from a reallocation
adjustment that was placed in a separate
subgrouping pursuant to 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,
unless the IRS determines that such net
negative adjustment should be taken
into account under paragraph (b)(1)(v)
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) of this section) is
treated as a net positive adjustment
described in paragraph (e)(3)(ii) of this
section and is excluded from the
calculation of the total netted
partnership adjustment under paragraph
(b)(2) 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. For rules related to creditable
expenditures other than CFTEs, see
paragraph (e)(3)(iii)(B) of this section.
(B) [Reserved]
(4) Net positive adjustment and net
negative adjustment defined—(i) Net
positive adjustment. A net positive
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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 (f)(1) 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
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
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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
(g)(2)(ii) of this section) and a specific
imputed underpayment (described in
paragraph (g)(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 (f) 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
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,
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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 (g)(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, unless
otherwise stated, 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, 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.
(1) 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 not have been
netted at the partnership level with the $5
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adjustment to ordinary income and would
not have been required to be allocated to the
partners of the partnership as a single
partnership-related item for purposes of
section 702(a), other provision of the Code,
regulations, forms, instructions, or other
guidance prescribed by the IRS. Because 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 and because
it might be limited if taken into account by
any person, the ¥$10 adjustment must be
placed in a separate subgrouping from the $5
adjustment to ordinary income. See
paragraph (d)(3)(i) of this section. 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.
(2) Example 2. The facts are the same as
Example 1 in paragraph (h)(1) of this section,
except that the ¥$10 adjustment to the
ordinary deduction would have been netted
at the partnership level with the $5
adjustment to ordinary income and 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), other provision of the Code,
regulations, forms, instructions, or other
guidance prescribed by the IRS. Therefore,
the $5 adjustment and the ¥$10 adjustment
must be placed in the same subgrouping
within the residual grouping. The $5
adjustment and the ¥$10 adjustments are
then netted in accordance with paragraph (e)
of this section. Such netting results in a net
negative adjustment (as defined under
paragraph (e)(4)(ii) of this section) of ¥$5.
Pursuant to paragraph (f) of this section, the
¥$5 net negative adjustment is an
adjustment that does not result in an imputed
underpayment. Because the only net
adjustment is an adjustment that does not
result in an imputed underpayment, there is
no imputed underpayment.
(3) Example 3. Partnership reports on its
2019 partnership return ordinary income of
$300, long-term capital gain of $125, longterm 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 adjustment
to 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 are no subgroupings within the residual
grouping. Under paragraph (b)(2) of this
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section, 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)(v) of this section, the $142 is increased
by the $2 credit adjustment, resulting in an
imputed underpayment of $144.
(4) Example 4. Partnership reported on its
2019 partnership return long-term capital
gain of $125. 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 and is taken into account in
accordance with § 301.6225–3. 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.
(5) 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
reported a portion of the expenses as a
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
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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
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.
(6) 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.
(7) 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) of this section, the adjustment to
the character of the liability is an adjustment
to an item that cannot be allocated under
section 704(b). The adjustment therefore is
treated as 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.
(8) 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
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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.
(9) 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
positive adjustment to (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.
(10) 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
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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 positive adjustment to (decrease in)
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.
(11) 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 income
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 percent and to B 25 percent. Items
related to DE2: To A 25 percent and to B 75
percent. 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.
(12) Example 12. Partnership has two
partners, A and B. For the 2019 taxable year,
Partnership allocated $70 of long term capital
loss to B as well as $30 of ordinary income.
In an administrative proceeding with respect
to Partnership’s 2019 taxable year, the IRS
determines that the $30 of ordinary income
and the $70 of long term capital loss should
be reallocated from B to A. The partnership
adjustments are a decrease of $30 of ordinary
income (¥$30 adjustment) allocated to B and
a corresponding increase of $30 of ordinary
income ($30 adjustment) allocated to A, as
well as a decrease of $70 of long term capital
loss ($70 adjustment) allocated to B and a
corresponding increase of $70 of long term
capital loss (¥$70 adjustment) allocated to
A. See paragraph (c)(2)(ii) of this section.
Pursuant to paragraph (d)(3)(ii)(A) of this
section, for purposes of determining the
imputed underpayment, each positive
adjustment and each negative adjustment
allocated to A and B is placed in its own
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6539
separate subgrouping. However,
notwithstanding the general requirement that
reallocation adjustments be subgrouped
separately, the reallocation adjustments
allocated to A and B may be subgrouped in
accordance with paragraph (d)(3)(i) of this
section because there are two reallocation
adjustments allocated to each of A and B,
respectively. Pursuant to paragraph (d)(3)(i)
of this section, because the partnership
adjustment allocated to A would not have
been netted at the partnership level and
would not have been allocated to A as a
single partnership-related item for purposes
of section 702(a), other provisions of the
Code, regulations, forms, instructions, or
other guidance prescribed by the IRS, the
positive adjustment and the negative
adjustment allocated to A remain in separate
subgroupings. For the same reasons with
respect to the adjustments allocated to B, the
positive adjustment and the negative
adjustment allocated to B also remain in
separate subgroupings. As a result, the
reallocation grouping would have four
subgroupings, one for each adjustment: The
decrease in ordinary income allocated to B
(¥$30 adjustment), the increase in ordinary
income allocated to A ($30 adjustment), the
decrease in long term capital loss allocated
to B ($70 adjustment), and the increase long
term capital loss allocated to A (¥$70
adjustment). Pursuant to paragraph (e) of this
section, no netting may occur between
subgroupings. Accordingly, the ordinary
income allocated to A ($30 adjustment) and
the long term capital loss allocated to B ($70
adjustment) are both net positive
adjustments. These net positive adjustments
are added together to determine the total
netted partnership adjustment of $100. The
total netted partnership adjustment is
multiplied by 40 percent, which results in an
imputed underpayment of $40. The ordinary
income allocated to B (¥$30 adjustment) and
the long term capital loss allocated to A
(¥$70 adjustment) are net negative
adjustments treated as adjustments that do
not result in an imputed underpayment taken
into account by the partnership pursuant to
§ 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, and ending
after August 12, 2018.
(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. 5. 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
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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
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
income 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 income 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
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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;
and
(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—
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(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
§ 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
was allocated in the NOPPA, or if the
appropriate allocation was not
addressed in the NOPPA, how the
adjustment would be properly allocated
under subchapter K of chapter 1 of the
Internal Revenue Code (subchapter K) 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.
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(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
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), (3), and (5) through
(10) of this section with respect to any
relevant partner. Notwithstanding the
preceding sentence, the partnership may
request that the IRS apply the rule in
paragraph (b)(3)(iii)(A) of this section
when determining each relevant
partner’s distributive share for purposes
of this paragraph (b)(3)(iv). 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. Any calculation by the
partnership that is necessary to comply
with the rules in this paragraph
(b)(3)(iv) is not considered a revaluation
for purposes of section 704.
(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
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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 (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
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6541
substantiate a particular type of
modification, the manner for submitting
documents and other information to the
IRS, and recordkeeping requirements.
Pursuant to section 6241(10), the IRS
may require the partnership to file or
submit anything required to be filed or
submitted under this section to be filed
or submitted electronically. 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, or if the IRS determines
there is a failure by any person to make
any required payment, 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 such information as is
required by forms, instructions, and
other guidance prescribed by the IRS or
that is otherwise requested by the IRS
related to the requested modification.
Such information may include 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 or wholly-owned
entity disregarded as separate from its
owner for Federal income tax purposes
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
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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
prescribed by the IRS 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 the form and
manner prescribed by form,
instructions, or other guidance
prescribed by the IRS to waive the 270day 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
adjustments properly allocable to such
relevant partner are taken into account
and any amount due is paid in
accordance with 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
paragraph (d)(2) of this section by
submitting a modification request based
on the alternative procedure to filing
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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 the alternative procedure
described in paragraph (d)(2)(x) of this
section, an amended return
modification request under paragraph
(d)(2) of this section will not be
approved unless the provisions of this
paragraph (d)(2)(ii) are satisfied. The
partnership may satisfy the
requirements of paragraph (d)(2) of this
section by demonstrating in accordance
with forms, instructions, and other
guidance provided by the IRS that a
relevant partner has previously taken
into account the partnership
adjustments described in paragraph
(d)(2)(i) of this section, made any
required adjustments to tax attributes
resulting from the partnership
adjustments for the years described in
paragraph (d)(2)(ii)(B) of this section,
and made all required payments under
paragraph (d)(2)(ii)(A) of this section.
(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 all
partnership 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. Except for a passthrough partner calculating its payment
amount pursuant to paragraph (d)(2)(vi)
of this section, for purposes of this
paragraph (d)(2)(ii)(A), the term tax
means tax imposed by chapter 1 of the
Internal Revenue Code (chapter 1).
(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
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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
partnership adjustments that reallocate
the distributive shares 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 adjustments file amended returns
in accordance with paragraph (d)(2) of
this section. 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
adjustments file amended returns
provided any relevant partners affected
by the reallocation not filing amended
returns take into account their
distributive share of the adjustments
through other modifications approved
by the IRS (including the alternative
procedure 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
adjustments that reallocate 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 adjustments and the other
affected relevant partner signs a closing
agreement with the IRS taking into
account the adjustments. Similarly, in
the case of adjustment that reallocate
income from one partner to another, the
IRS may determine that the
requirements of this paragraph
(d)(2)(ii)(C) have been satisfied to the
extent an affected relevant partner meets
the requirements of paragraph (d)(3) of
this section (regarding tax-exempt
partners) and through such modification
fully takes into account all adjustments
reallocated to the affected relevant
partner.
(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
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IRS. Except as otherwise provided
under the alternative procedure
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 paragraph
(d)(2) of this section 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 (directly or indirectly)
through a pass-through partner that
could be subject to tax imposed by
chapter 1 (chapter 1 tax) 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,
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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
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
or claim for refund that takes into
account partnership adjustments except
as described in paragraph (d)(2) of this
section.
(B) Further amended returns
restricted. Except as described in
paragraph (d)(2)(vii)(C) of this section, if
a relevant partner files an amended
return under paragraph (d)(2) of this
section, or satisfies paragraph (d)(2) of
this section by following the alternative
procedure under paragraph (d)(2)(x) of
this section (the alternative procedure),
such partner may not file a subsequent
amended return or claim for refund to
change the treatment of partnership
adjustments taken into account through
amended return or the alternative
procedure.
(C) Subsequent returns in the case of
changes to partnership adjustments or
denial of modification. Notwithstanding
paragraph (d)(2)(vii)(B) of this section, a
relevant partner that has previously
filed an amended return under
paragraph (d)(2) of this section, or
satisfied the requirements of paragraph
(d)(2) of this section through the
alternative procedure, to take
partnership adjustments into account
may, in accordance with forms,
instructions, and other guidance
prescribed by the IRS, file a subsequent
return or claim for refund if a
determination is made by a court or by
the IRS that results in a change to the
partnership adjustments taken into
account in modification under
paragraph (d)(2) of this section or a
denial of modification by the IRS under
paragraph (c)(2)(i) of this section with
respect to a modification request under
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6543
paragraph (d)(2) of this section. Such
determinations include a court decision
that changes the partnership
adjustments for which modification was
requested or a settlement between the
IRS and the partnership pursuant to
which the partnership is not liable for
all or a portion of the imputed
underpayment for which modification
was requested. Any amended return or
claim for refund filed under this
paragraph (d)(2)(vii) is subject to the
period of limitations under section
6511.
(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
paragraph (d)(2) of this section. 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. Unless forms, instructions or other
guidance provided by the IRS allow for
an alternative procedure for raising a
partner-level defense (as described in
§ 301.6226–3(d)(3)), a relevant partner
may raise a partner-level defense by first
paying the penalty, addition to tax, or
additional amount with the amended
return filed under paragraph (d)(2) of
this section 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
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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
paragraph (d)(2)(x) of this section 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 paragraph
(d)(2)(x) of this section is not a claim for
refund with respect to any person.
(B) Modifications with respect to
reallocation adjustments. A submission
made in accordance with paragraph
(d)(2)(x) of this section 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 tax-
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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))
requesting modification under this
section, an imputed underpayment is
determined without regard to any
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—
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(1) The specified partner’s taxable
year in which or with which the
adjustment year (as defined in
§ 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) If the adjustment year has not yet
been determined, the most recent year
for which the publicly traded
partnership has filed a return under
section 6031, 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 any
year.
(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 the
publicly traded partnership requesting
modification under this section;
(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 the year described
in paragraph (d)(5)(ii)(B)(2) of this
section. Notwithstanding the preceding
sentence, an indirect partner of the
publicly traded partnership requesting
modification under this section may
also be a qualified relevant partner
under this paragraph (d)(5)(iv) if that
indirect partner meets the requirements
of paragraph (d)(5)(iii)(B) and (C) of this
section for each year beginning with the
first affected year through the year
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
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suspended passive activity loss
carryovers at the end of the adjustment
year to take into account the amount of
any passive activity 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 activity 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. In the case of
an indirect partner that is a qualified
relevant partner, the IRS may prescribe
additional guidance through forms,
instructions, or other guidance to
require reporting under this paragraph
(d)(5)(v). The reduction in suspended
passive activity loss carryovers as
reported to a specified partner or
qualified relevant 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 and qualified relevant
partners under section 6223.
(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 paragraph (d)(6) of this section
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.
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(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 paragraph (d)(7) of this section 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
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, 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
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under § 301.6225–1. Any required
payment under the closing agreement
may include amounts of tax, including
tax under chapters other than chapter 1,
interest, penalties, additions to tax and
additional amounts. 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, in the reviewed year, the
relevant partner was a foreign person
who qualified under an income tax
treaty with the United States for a
reduction or exemption from tax with
respect to such partnership-related item.
A partnership requesting modification
under this section may also request a
treaty modification under this paragraph
(d)(9) regardless of the treaty status of its
partners if, in the reviewed year, the
partnership itself was an entity eligible
for such treaty benefits.
(10) Other modifications. A
partnership may request a modification
not otherwise described in paragraph (d)
of this section, and the IRS will
determine whether such modification is
accurate and appropriate in accordance
with paragraph (c)(4) of this section.
Additional types of modifications and
the documentation necessary to
substantiate such modifications may be
set forth in forms, instructions, or other
guidance prescribed by the IRS.
(e) 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
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no partnership requests modification
under this section except as provided in
the example.
(1) 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 income 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, J, and K, all
individuals. For purposes of this section, if
Partnership requests modification with
respect to A, B, C, F, G, H, J, and K, 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 income
tax purposes and modification was not
requested with respect to P and S.
(2) 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
§ 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).
(3) 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
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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 allocable 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).
(4) Example 4. The facts are the same as
in Example 3 in paragraph (f)(3) of this
section, 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 § 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).
(5) Example 5. The facts are the same as
in Example 3 in paragraph (f)(3) of this
section, except that Partnership also timely
requests modification under paragraph (d)(2)
of this section 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
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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) of this section approved by
the IRS with respect to B’s partner C, a taxexempt 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.
(6) Example 6. The facts are the same as
in Example 3 in paragraph (f)(3) of this
section, 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 paragraph (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
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.
(7) 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. Under the
partnership agreement in effect for
Partnership’s 2019 taxable year, the longterm capital gain and the increase in
depreciation would be specially allocated to
B and the increase in ordinary income would
be specially allocated to A. In accordance
with § 301.6225–1(c) and (d), the three
adjustments are placed into three separate
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subgroupings within the residual grouping
because the partnership adjustments would
not have been netted at the partnership level
and would not have been required to be
allocated to the partners of the partnership as
a single, net partnership-related item for
purposes of section 702(a), other provisions
of the Code, regulations, forms, instructions,
or other guidance prescribed by the IRS.
Accordingly, the total netted partnership
adjustment is $85 ($75 net positive
adjustment to ordinary income plus $10 net
positive adjustment to long term capital
gain), and the imputed under payment is $34
($85 multiplied by 40 percent). The net
negative adjustment to depreciation is an
adjustment that does not result in an imputed
underpayment subject to treatment under
§ 301.6225–3. 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 would consist of the $75
increase in ordinary income, and thus the
total netted partnership adjustment for the
specific imputed underpayment would be
$75. The specific imputed underpayment is
thus $30 ($75 multiplied by 40 percent). The
general imputed underpayment would
consist of two adjustments: The long term
capital gain adjustment and the depreciation
adjustment. The long term capital gain
adjustment and the depreciation adjustment
would be placed in different subgroupings
under § 301.6225–1(d) because they are
treated separately under section 702.
Accordingly, the long term capital gain
adjustment and the depreciation adjustment
are not netted, and the long term capital gain
adjustment would be a net positive
adjustment while the depreciation
adjustment would be a net negative
adjustment. The long term capital gain net
positive adjustment would be the only net
positive adjustment, resulting in a total
netted partnership adjustment of $10. The
general imputed underpayment is $4 ($10
multiplied by 40 percent), and the net
negative adjustment to depreciation of $25
would be an adjustment that does not result
in an imputed underpayment under
§ 301.6225–1(f) associated with the general
imputed underpayment.
(8) 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
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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, none
of the adjustments is 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 in a net
positive adjustment for the residual grouping.
(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, and ending
after August 12, 2018.
(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. 6. 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
§ 301.6225–1(f)) are taken into account
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6547
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
(7) 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. Except as provided in
forms, instructions, and other guidance
prescribed by the Internal Revenue
Service (IRS), 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
does not result in an imputed
underpayment, and the IRS approves
the modification, such partnership
adjustment is not taken into account by
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the partnership in the adjustment year
in accordance with § 301.6225–1(a).
(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.
(7) Adjustments taken into account
previously by partners. If, prior to the
mailing of a notice of administrative
proceeding by the IRS or the filing of an
administrative adjustment request by
the partnership, a partner has
previously taken into account an
adjustment that does not result in an
imputed underpayment that would have
been taken into account under this
section, such partnership adjustment is
not taken into account by such partner.
(c) Treatment of adjustment year
partners. The rules under subchapter K
of chapter 1 of the Internal Revenue
Code with respect to the treatment of
partners apply in the case of
adjustments taken into account by the
partnership under this section.
(d) Examples. The following examples
illustrate the rules of this section. For
purposes of these examples, unless
otherwise provided, each partnership is
subject to the provisions of subchapter
C of chapter 63 of the Internal Revenue
Code, 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.
(1) Example 1. For all of Partnership’s
2019, 2020, and 2021 partnership taxable
years, Partnership has two equal partners, A
and B. The IRS initiates an administrative
proceeding with respect to Partnership’s
2019 partnership taxable year. The IRS mails
a notice of proposed partnership adjustment
(NOPPA) to Partnership for the 2019
partnership taxable year proposing a
recharacterization adjustment, changing a
$100 ordinary loss to a $100 long term capital
loss. Under § 301.6225–1, this
recharacterization adjustment results in two
adjustments: A $100 increase to ordinary
income (positive adjustment) and a ¥$100
decrease in long term capital gain (negative
adjustment). Under § 301.6225–1(b), the $100
positive adjustment is the total netted
partnership adjustment, which is multiplied
by the highest rate of 40 percent, resulting in
a $40 imputed underpayment. Under
§ 301.6225–1(f), the ¥$100 negative
adjustment is an adjustment that does not
result in an imputed underpayment and is
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taken into account in accordance with this
section. On March 1, 2021, the IRS mails a
notice of final partnership adjustment (FPA),
and because Partnership does not file a
petition for readjustment with respect to the
FPA, the adjustments are finally determined
in 2021, and the adjustment year is
determined to be 2021 pursuant to
§ 301.6241–1(a)(1). Pursuant to paragraph (a)
of this section, Partnership takes into account
the ¥$100 adjustment that does not result in
an imputed underpayment on its 2021
partnership return. In addition to the ¥$100
adjustment to partnership’s 2019 taxable year
taken into account under this section,
Partnership has an additional $300 in long
term capital gain reportable in its 2021
taxable year. The ¥$100 negative adjustment
and the $300 long term capital gain are
Partnership’s only long term capital gains
and losses for its 2021 taxable year. Because
the ¥$100 net negative adjustment is an
adjustment to long term capital gain, which
is a separately stated item under section
702(a)(2), the ¥$100 negative adjustment
must be taken into account in accordance
with paragraph (b)(2) of this section.
Partnership includes both the ¥$100
negative adjustment and the $300 in long
term capital gain as separately stated items
on its 2021 tax return.
(2) Example 2. The facts are the same as
in Example 1 in paragraph (d)(1) of this
section, except that the IRS proposes a
reallocation adjustment instead of a
recharacterization adjustment. The IRS
determines that the ¥$100 ordinary loss that
the Partnership allocated equally to A and B
should instead all be allocated all to A. The
IRS mails a NOPPA for the 2019 partnership
taxable year proposing a reallocation
adjustment resulting in a $50 increase in
ordinary loss allocated to A (negative
adjustment) and a $50 decrease in ordinary
loss allocated to B (positive adjustment).
Because the adjustments are the result of a
reallocation, they are placed in separate
subgroupings pursuant to § 301.6225–1(d).
Because the adjustments are in different
subgroupings, the adjustments are not netted
under § 301.6225–1(e), resulting in a net
negative adjustment of ¥$50 allocated to A
and a net positive adjustment of $50 to B.
Pursuant to § 301.6225–1(b), the total netted
partnership adjustment includes the $50 net
positive adjustment, and the imputed
underpayment is $20 ($50 total netted
partnership adjustment × 40 percent).
Pursuant to § 301.6225–1(f), the ¥$50 net
negative adjustment is an adjustment that
does not result in an imputed underpayment
and is taken into account in accordance with
this section. On March 1, 2021, the IRS mails
an FPA, and because Partnership does not
file a petition for readjustment with respect
to the FPA, the adjustments are finally
determined in 2021, and the adjustment year
is determined to be 2021 pursuant to
§ 301.6241–1(a)(1). Pursuant to paragraph (a)
of this section, Partnership takes into account
the ¥$50 adjustment that does not result in
an imputed underpayment on its 2021
partnership return. In addition to the ¥$50
net negative adjustment to partnership’s 2019
taxable year taken into account under this
section, Partnership also has an additional
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$300 in ordinary income reportable in its
2021 taxable year unrelated to the
administrative proceeding with respect to
Partnership’s 2019 partnership taxable year.
Because the ¥$50 net negative adjustment is
due to a reallocation, the adjustment must be
taken into account under paragraph (b)(4) of
this section. Because the net negative
adjustment was determined to have been
entirely allocable to A, and because A was a
reviewed year partner and is also an
adjustment year partner, the net negative
adjustment is taken into account by
Partnership by allocating the entire
adjustment to A on its 2021 tax return. The
¥$50 negative adjustment does not reduce
the $300 in ordinary income.
(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, and ending
after August 12, 2018.
(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 301.6226–1 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. In addition, a
partnership making a valid election
under paragraph (c) 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
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 included in the
FPA.
(b) Effect of election—(1) Reviewed
year partners. If a partnership makes a
valid election under this section with
respect to any imputed underpayment,
the reviewed year partners (as defined
in § 301.6241–1(a)(9)) must take into
account their share of the partnership
adjustments (as defined in § 301.6241–
1(a)(6)) that are associated with that
imputed underpayment and are liable
for any tax, penalties, additions to tax,
additional amounts, and interest as
described in § 301.6226–3. See
§ 301.6226–2(f) regarding the
determination of each reviewed year
partner’s share of the partnership
adjustments, including the effect of any
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modification approved by the Internal
Revenue Service (IRS) under
§ 301.6225–2.
(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 adjustments 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
and § 301.6226–2 (regarding statements
filed with the IRS and furnished to
reviewed year partners) are satisfied. 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) 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.
(3) 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 prescribed by the
IRS and include the information
specified in paragraph (c)(3)(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 to which the election
applies;
(E) The name and TIN (or alternative
form of identification as prescribed by
forms, instructions, or other guidance)
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of each reviewed year partner of the
partnership;
(F) The current or last address of each
reviewed year partner that is known to
the partnership; and
(G) Any other information prescribed
by the IRS in forms, instructions, and
other guidance.
(d) Determining an election is invalid.
The IRS may determine an election to be
invalid without first notifying the
partnership or providing the partnership
an opportunity to correct any failure to
satisfy all of the provisions of this
section and § 301.6226–2. 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. The IRS may not determine that
an election is invalid based on errors
timely corrected by the partnership in
accordance with § 301.6226–2(d).
(e) 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, 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–
1(a)(6)(ii)) 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).
(f) 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
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6549
petition under section 6234(a). See
§ 301.6226–2(b)(3)(iii).
(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, and ending
after August 12, 2018.
(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 301.6226–2 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
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. A failure to furnish a correct
statement in accordance with this
section is subject to penalty under
section 6722. See section 6724(d)(2).
(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 statements described in paragraph
(a) of this section to each reviewed year
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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 and, if a correct
address is identified, mail the statement
to the reviewed year partner at the
correct address.
(3) Examples. The following examples
illustrate the rules of this paragraph (b).
(i) 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
that includes 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 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.
(ii) Example 2. The facts are the same as
in Example 1 in paragraph (b)(3)(i) of this
section, 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.
(iii) 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 that
includes a single imputed underpayment.
Partnership makes a timely election under
section 6226 in accordance with § 301.6226–
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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 § 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
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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
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 (or alternative
form of identification as prescribed by
forms, instructions, or other guidance)
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
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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 paragraph
(f)(1)(ii) or (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 partnershiprelated 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
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to any indirect partner 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 of the Internal Revenue Code. 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 § 301.6241–6(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, and ending
after August 12, 2018.
(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. 9. 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
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
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6551
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, nothing in this section
entitles any partner to a refund of
chapter 1 tax to which such partner is
not entitled. 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 § 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
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return filed under section 6225(c)(2) by
the reviewed year partner); plus
(B) Amounts not included in
paragraph (b)(2)(ii)(A) of this section but
previously assessed or collected
(including the amounts defined in
§ 1.6664–2(d) of this chapter and any
amounts paid by the partner in
accordance with § 301.6225–2); less
(C) The amount of rebates made (as
defined in § 1.6664–2(e) of this chapter).
(iii) Formulaic expression of the
correction amount for the first affected
year. The correction amount also may be
expressed as—
Correction amount = A¥(B + C¥D)
return filed under section 6225(c)(2) by
a reviewed year partner); plus
(B) Amounts not included in
paragraph (b)(3)(ii)(A) of this section but
previously or collected (including the
amounts defined in § 1.6664–2(d) of this
chapter and any amounts paid by the
partner in accordance with § 301.6225–
2); less
(C) The amount of rebates made (as
defined in § 1.6664–2(e) of this chapter).
(iii) Formulaic expression 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 had the items as
adjusted been properly reported on the
return for the first affected year;
B = the amount shown as chapter 1 tax on
the return for the first affected year
(taking into account amended returns);
C = amounts previously assessed or
collected; and
D = the amount of rebates made.
Where:
A = the amount of chapter 1 tax that would
have been imposed for the intervening
year;
B = the amount shown as chapter 1 tax on
the return for the intervening year
(taking into account amended returns);
C = amounts previously assessed or
collected; 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 paragraph
(b)(3) of this section.
(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
(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
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 under part 1 of this chapter.
(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
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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 (including any 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.
(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
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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 (including a
pass-through partner (as defined in
§ 301.6241–1(a)(5))) 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 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 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
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
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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. In accordance with forms,
instructions, and other guidance
prescribed by the IRS, 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
§ 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.
(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;
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6553
(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 (or alternative
form of identification as prescribed by
forms, instructions, or other guidance)
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
determined at the audited partnership
level 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 § 301.6226–2. An
affected partner that is a pass-through
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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 of the Internal Revenue Code. 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
§ 301.6241–6(b)(4), and an affected
partner must comply with the
requirements of paragraph (f) of this
section. For purposes of applying both
§ 301.6241–6(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
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
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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
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
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underpayment were a correction
amount 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,
§ 301.6241–6(b)(3) applies to the passthrough partner by substituting ‘‘passthrough partner’’ for ‘‘partnership’’
where § 301.6241–6(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 § 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
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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 § 301.6241–6(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 § 301.6241–6(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
separate from its owner for Federal
income 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
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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, unless
otherwise stated, 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, no
penalties, additions to tax, or additional
amounts are determined at the
partnership level, all persons are U.S.
persons, 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.
(1) 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
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 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
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6555
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.
(2) 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 § 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,
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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.
(3) 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
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
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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
§ 301.6241–6(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–
6(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
§ 301.6241–6(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
§ 301.6241–6(b)(4)(i) as a credit under section
33 against C’s income tax liability on his
2023 return.
(4) 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,
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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 the general imputed
underpayment that resulted from 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. Because E, F, G, and
H are all individuals, 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.
(5) 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
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$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 longterm 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
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 and taking into account
any chapter 1 tax paid with those amended
returns. F also takes into account the interest
paid with F’s amended returns when
determining the interest under paragraph (c)
of this section that must be paid in the
reporting year.
(6) Example 6. Partnership has two equal
partners for the 2020 tax year: M (an
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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 M and J each reflect a
partnership adjustment of $250,000 of
ordinary income. M takes her share of the
adjustments reflected on the statements
furnished by Partnership into account on M’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 paragraph (b).
(7) 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
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
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6557
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 a
partnership adjustment tracking report and
furnishing 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.
(8) 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 $500 increase in
ordinary income and a $250 increase in
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 a partnership adjustment
tracking report and furnishing a statement to
R. Q timely filed a partnership adjustment
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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. 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. Pursuant to paragraph (e)(1) of this
section, Q files the partnership adjustment
tracking report and pay the amounts due
under paragraph (e)(4) of this section by
September 15, 2024, the extended due date
of Partnership’s return for the adjustment
year, 2023. Pursuant to paragraph (e)(4)(v) of
this section, on its 2024 return, the year in
which Q made its payment of the imputed
underpayment, Q reports and allocates the
$250 capital loss to its shareholders for its
2024 taxable year as a capital loss as
provided in § 301.6225–3.
(9) 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
statements described in § 301.6226–2 and
furnishes statements to its partners reflecting
their share of the partnership adjustments as
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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, and ending
after August 12, 2018.
(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 301.6227–1 is added
to read as follows:
§ 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
§ 301.6241–1(a)(6)(ii)) 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 are adjustments
described in § 301.6225–1(f)(1) that do
not result in an imputed underpayment
(as determined under § 301.6227–2(a)),
such adjustments must be taken into
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account by the reviewed year partners
in accordance with § 301.6227–3. A
partner may not make a request for an
administrative adjustment of a
partnership-related item except in
accordance with § 301.6222–1 or 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
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. For rules regarding a notice of
change to the amount of creditable
foreign tax expenditures see paragraph
(g) of this section.
(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 (including a
request filed by a partner in accordance
with § 301.6222–1) 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 by a
partnership, 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 described
in §§ 301.6223–1 and 301.6223–2).
(2) Contents of AAR filed with the
IRS. A partnership must include the
information described in this paragraph
(c)(2) when filing an AAR with the IRS.
In the case of a failure by the
partnership to provide the information
described in this paragraph (c)(2), the
IRS may, but is not required to,
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invalidate an AAR or readjust any items
that were adjusted on the AAR. An 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
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 (e)(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
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reviewed year. If the partnership pays
an imputed underpayment under
§ 301.6227–2(b) with respect to the
adjustments requested in the AAR, the
reviewed year partner’s share of the
adjustments requested in the AAR only
includes any adjustments that did not
result in the imputed underpayment, as
determined under § 301.6227–2(a).
(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
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) Administrative proceeding for a
taxable year for which an AAR is filed.
Within the period described in section
6235, the IRS may initiate an
administrative proceeding with respect
to the partnership for any partnership
taxable year regardless of whether the
partnership filed an AAR with respect
to such taxable year and may adjust any
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.
(g) [Reserved]
(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, and ending
after August 12, 2018.
(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 301.6227–2 is added
to read as follows:
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§ 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 an 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 any
imputed underpayment 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 an
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
(D) Provide documentation to support
the partnership’s eligibility for the
modification.
(b) Adjustments resulting in an
imputed underpayment taken into
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account by the partnership—(1) In
general. Except in the case of a valid
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 an imputed
underpayment, as well as any penalties
and interest paid by the partnership
with respect to an 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
any 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 any 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 an
imputed underpayment is determined
under chapter 67 of the Internal
Revenue Code 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 date the
AAR is filed. See § 301.6233(a)–1(b). In
the case of any failure to pay an
imputed underpayment on the date the
AAR is filed, interest is determined in
accordance with section 6233(b)(2) and
§ 301.6233(b)–1(c).
(3) Coordination with chapters 3 and
4 of the Internal Revenue Code—(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 § 301.6241–6(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 § 301.6241–6(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
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
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taken into account by reviewed year
partners. In lieu of paying an 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 that are associated with such
imputed underpayment 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 to which the election
relates. Rather, each reviewed year
partner must take into account their
share of the adjustments requested in
the AAR that are associated with such
imputed underpayment in accordance
with § 301.6227–3. If an election is
made under this paragraph (c) with
respect to an imputed underpayment,
modifications applied under paragraph
(a)(2) of this section to such imputed
underpayment are disregarded and all
adjustments requested in the AAR that
are associated with such imputed
underpayment 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 any
adjustments requested in an AAR are
adjustments that 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 that do not result in
an imputed underpayment 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, and ending
after August 12, 2018.
(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 301.6227–3 is added
to read as follows:
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§ 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) that either do not result in an
imputed underpayment (as described in
§ 301.6225–1(f)(1)) or are associated
with an imputed underpayment for
which the partnership makes an
election under § 301.6227–2(c). 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 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 paragraph (b) of
this section.
(i) 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
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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)(1) 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).
(ii) Example 2. The facts are the same as
in Example 1 in paragraph (b)(2)(i) of this
section, 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 -$25 ($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 any
overpayment.
(c) Reviewed year partners that are
pass-through partners—(1) In general.
Except as provided in paragraph (c) of
this section, 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
adjustments on a statement received by
the pass-through partner under
paragraph (a) or (c)(1) of this section do
not result in an imputed underpayment
for the pass-through partner (as
described in § 301.6225–1(f)(1)), the
pass-through partner must take the
adjustments that do not result in an
imputed underpayment into account in
accordance with § 301.6226–3(e)(3). The
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pass-through partner must take such
adjustments into account under this
paragraph (c)(2) even in situations
where the pass-through partner pays an
imputed underpayment in accordance
with § 301.6226–3(e)(4)(iii). The passthrough 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 affected
partners (as defined in § 301.6226–
3(e)(3)(i)).
(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–
1(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 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;
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6561
(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
§ 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, and ending
after August 12, 2018.
(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 301.6231–1 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 § 301.6241–1(a)(6)(ii)) 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)).
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(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 § 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. Except as described in
§ 301.6223–1(d)(2) and (e)(2), if the IRS
withdraws a NAP or NOPPA under this
paragraph (f), the NAP or NOPPA is
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treated as if it were never issued, and
the withdrawn NAP or NOPPA 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 limitation
under § 301.6222–1(c)(5) regarding
inconsistent treatment, and 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
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, and ending
after August 12, 2018.
(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. 14. Section 301.6232–1 is added
to read as follows:
§ 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
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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
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–
1(a)(6)(ii)) 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
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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
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 in
accordance with 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
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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, and ending
after August 12, 2018.
(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 301.6233(a)–1 is
added to read as follows:
§ 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), 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—(1) Interest on an
imputed underpayment. 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
paragraph (b) of this section 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—
(i) The date prescribed for payment
(as described in § 301.6232–1(b));
(ii) The due date of the partnership
return (without regard to extension) for
the adjustment year (as defined in
§ 301.6241–1(a)(1)); or
(iii) The date the imputed
underpayment is fully paid.
(2) Interest on penalties with respect
to the reviewed year. The interest
imposed on any penalties, additions to
tax, and additional amounts determined
under paragraph (c) of this section is the
interest that would be imposed under
chapter 67 of the Code treating the
partnership return for the reviewed year
as the return of tax with respect to
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6563
which such penalty, addition to tax, or
additional amount is imposed.
(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 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.
Except as provided in § 301.6225–2(d),
a partner-level defense (as described in
§ 301.6226–3(d)(3)) may not be raised in
a proceeding of the partnership.
(2) Determination of the amount of
accuracy-related penalty and fraud
penalty—(i) In general. The amount of
any penalty under part II of subchapter
A of chapter 68 of the Code (accuracyrelated or fraud penalties) that relates to
any partnership adjustment for the
reviewed year is determined in
accordance with this paragraph (c)(2). If
in determining the imputed
underpayment under § 301.6225–1 (or
§ 301.6225–2 in the case of
modification), any grouping or
subgrouping contains a negative
adjustment (as defined in § 301.6225–
1(d)(2)(ii)) and at least one positive
adjustment (as defined in § 301.6225–
1(d)(2)(iii)) that is subject to penalty,
first apply the rules for allocating
negative adjustments in paragraph
(c)(2)(iii) of this section. Then, apply the
rules in paragraph (c)(2)(ii) of this
section to calculate penalty amounts. If
there are no negative adjustments, do
not apply the rules in paragraph
(c)(2)(iii) of this section and instead
apply only the rules in paragraph
(c)(2)(ii) of this section. For all purposes
under paragraph (c)(2) of this section,
adjustments that do not result in the
imputed underpayment (as described in
§ 301.6225–1(f)) and adjustments
excluded from the determination of the
imputed underpayment under
§ 301.6225–2(b)(2) are disregarded.
(ii) Calculating the portion of an
imputed underpayment subject to
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penalty and penalty amounts. To
determine the portion of an imputed
underpayment subject to a penalty and
the amount of a particular penalty,
apply the following steps to all
adjustments subject to penalty
remaining after application of negative
adjustments (as described in paragraph
(c)(2)(iii) of this section) and to all
adjustments subject to penalty
contained in groupings or subgroupings
that do not contain a negative
adjustment.
(A) For purposes of applying this
paragraph (c)(2)(ii)(A), disregard
adjustments to credits or adjustments
treated as adjustments to credits. Total
all adjustments to which a particular
penalty was imposed and to which the
highest rate of tax in effect for the
reviewed year under section 1 or 11 was
applied when calculating the imputed
underpayment. See § 301.6225–
1(b)(1)(iv).
(B) Multiply the total in paragraph
(c)(2)(ii)(A) of this section by the highest
rate of tax in effect for the reviewed year
under section 1 or 11.
(C) If the imputed underpayment was
modified in accordance with
§ 301.6225–2(b)(3), repeat the steps in
paragraphs (c)(2)(ii)(A) and (B) of this
section for every tax rate applied in
calculating the imputed underpayment
by substituting the applicable tax rate
determined under § 301.6225–2(b)(3) for
the highest rate of tax in effect for the
reviewed year under section 1 or 11.
(D) Total all amounts determined after
completing the steps in paragraphs
(c)(2)(ii)(A) through (C) of this section.
(E) Adjust the amount calculated in
paragraph (c)(2)(ii)(D) of this section by:
(1) Increasing by the net adjustments
subject to the penalty in the credit
grouping (as described in paragraph
(c)(2)(iii)(C)(1) of this section) after
application of paragraph (c)(2)(iii)(A) of
this section; or
(2) Decreasing in accordance with the
rules in paragraph (c)(2)(iii)(C)(2) of this
section by the amount of negative
adjustments in the credit grouping if,
after application of paragraph
(c)(2)(iii)(A) of this section, only
negative adjustments in the credit
grouping remain.
(3) The result after completing the
calculation in paragraphs (c)(2)(ii)(E)(1)
and (2) of this section is the portion of
the imputed underpayment to which the
particular penalty was imposed.
(F) Multiply the total calculated in
paragraph (c)(2)(ii)(E) of this section by
the penalty rate applicable to the
particular penalty. This is the total
penalty amount for adjustments to
which the particular penalty was
imposed.
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(iii) Allocating negative
adjustments—(A) In general. Negative
adjustments offset positive adjustments
within the same grouping or, if the
negative adjustment is in a subgrouping,
within that same subgrouping. For
purposes of applying this paragraph
(c)(2)(iii), all adjustments to credits and
adjustments treated as adjustments to
credits are treated as grouped in the
credit grouping without regard to
whether the adjustments were
subgrouped for purposes of § 301.6225–
1 (or § 301.6225–2 in the case of
modification). Adjustments that do not
result in the imputed underpayment are
disregarded as provided in paragraph
(c)(2) of this section. Negative
adjustments are allocated in accordance
with the following rules:
(1) Negative adjustments are first
applied to offset positive adjustments to
which no penalties have been imposed.
(2) Any amount of negative
adjustments remaining after application
of paragraph (c)(2)(iii)(A)(1) of this
section are applied to offset adjustments
to which a penalty has been imposed at
the lowest penalty rate.
(3) Any amount of negative
adjustments remaining after application
of paragraph (c)(2)(iii)(A)(2) of this
section are applied to offset adjustments
to which a penalty has been imposed at
the next highest rate in ascending order
of rate until no amount of negative
adjustments remain or no positive
adjustments to which a penalty has been
imposed remain.
(B) Allocation of negative adjustment
within a penalty rate. The Internal
Revenue Service (IRS) may provide
additional guidance regarding the
ordering or allocation of negative
adjustments for purposes of paragraph
(c)(2)(iii)(A) of this section where more
than one penalty is imposed at the same
penalty rate.
(C) Adjustments remaining after
allocation of negative adjustments—(1)
In general. For purposes of paragraph
(c)(2)(ii) of this section, any positive
adjustment to which a penalty has been
imposed that has not been fully offset by
a negative adjustment after application
of paragraph (c)(2)(iii)(A) of this section
is a net adjustment subject to penalty
remaining after allocation of negative
adjustments.
(2) Additional rules regarding
allocation of negative credit amounts. If,
after application of paragraph
(c)(2)(iii)(A) of this section, an amount
of negative adjustments remain in the
credit grouping, the amount of
remaining negative adjustments may
reduce the portion of the imputed
underpayment that is subject to a
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penalty, but not below zero, in
accordance with the following rules:
(i) The amount of remaining negative
adjustments in the credit grouping are
first applied to the portion of the
imputed underpayment to which no
penalty has been imposed, as calculated
in accordance with paragraph
(c)(2)(iii)(C)(3) of this section.
(ii) Any amount of negative
adjustment in the credit grouping
remaining after application of paragraph
(c)(2)(iii)(C)(2)(i) of this section is
applied to the portion of the imputed
underpayment to which a penalty has
been imposed at the lowest penalty rate
as calculated in accordance with
paragraph (c)(2)(ii) of this section.
(iii) Any amount of negative
adjustments in the credit grouping
remaining after application of paragraph
(c)(2)(iii)(C)(1)(ii) of this section is
applied to the portion of the imputed
underpayment to which a penalty has
been imposed at the next highest rate in
ascending order of rate in accordance
with paragraph (c)(2)(iii) of this section
until no negative amount remains.
(3) Calculating the portion of the
imputed underpayment to which no
penalty was imposed before the
application of negative adjustments to
credits. To determine the portion of the
imputed underpayment that is not
subject to penalty for purposes of
paragraph (c)(2)(iii)(C)(2)(i) of this
section, apply the rules in paragraphs
(c)(2)(ii)(A) through (E) of this section of
this section but substitute adjustment to
which no penalty was imposed for
adjustments to which a particular
penalty was imposed.
(iv) Special rules—(A) 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)(iv)(A)
does not apply to any portion of the
imputed underpayment the partnership
establishes by a preponderance of the
evidence is not attributable to fraud.
(B) Substantial understatement
penalty under section 6662(d)—(1) 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)(2)(iv)(B)(1) 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)(iv)(B)(2) of this section as the tax
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required to be shown on the return for
the taxable year under section
6662(d)(1)(A)(i).
(2) Amount of tax required to be
shown on the return. The amount
described in this paragraph
(c)(2)(iv)(B)(2) 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)).
(C) 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).
(D) 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.
(v) 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.
(A) Example 1. In an administrative
proceeding with respect to Partnership’s
2018 partnership return, the IRS makes a
positive adjustment to ordinary income of
$100. The $100 adjustment 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 makes a
positive adjustment to long-term capital gain
of $300, but no penalty applies with respect
to that adjustment. These are the only
adjustments. The portion of the imputed
underpayment to which the 20-percent
penalty applies is $40 ($100 × 40 percent),
and the penalty is $8 ($40 × 20 percent).
(B) Example 2. The facts are the same as
in Example 1 in paragraph (c)(2)(v)(A) of this
section, except that the IRS makes a positive
adjustment to credits of $10. The adjustment
to 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). The portion of
the imputed underpayment to which the 20percent accuracy-related penalty applies is
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$50 (($100 × 40 percent) + $10), and the
penalty is $10 ($50 × 20 percent).
(C) Example 3. The facts are the same as
in Example 2 in paragraph (c)(2)(v)(B) of this
section, except that there is also a negative
adjustment to ordinary income of $50 that
was subgrouped under § 301.6225–1 with the
$100 positive adjustment to ordinary.
Because the $50 negative adjustment to
ordinary income was subgrouped under
§ 301.6225–1 with the $100 positive
adjustment to ordinary income, in
determining the portion of the imputed
underpayment subject to penalty, the $50
negative adjustment is applied to offset part
of the $100 positive adjustment to ordinary
income ($100¥$50 = $50). Accordingly, the
portion of the imputed underpayment to
which the 20-percent accuracy-related
penalty applies is $30 (($50 × 40 percent) +
$10), and the penalty is $6 ($30 × 20 percent).
(D) Example 4. The facts are the same as
in Example 3 in paragraph (c)(2)(v)(C) of this
section, 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 portion of
the imputed underpayment to which the 20
percent accuracy-related penalty applies
remains $30, and the 20-percent accuracyrelated penalty remains $6. The portion of
the imputed underpayment to which the 40percent gross valuation misstatement penalty
applies is $120 ($300 × 40 percent), and the
gross valuation misstatement penalty is $48
($120 × 40 percent). The total accuracyrelated penalty under section 6662(a) is $54.
(E) Example 5. 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. In an
administrative proceeding with respect to
Partnership’s 2019 taxable year, the IRS
timely mails a notice of proposed partnership
adjustment (NOPPA) to Partnership for its
2019 taxable year proposing a single
partnership positive adjustment to
Partnership’s ordinary income by $400,000.
The $400,000 positive adjustment 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 × 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
modification request. As a result,
Partnership’s total netted partnership
adjustment under § 301.6225–1(b)(2) is
$300,000 ($400,000 less $100,000 allocable to
C). The imputed underpayment is $120,000
(($300,000) × 40 percent), and the penalty is
$24,000 ($120,000 × 20 percent).
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6565
(F) Example 6. The facts are the same as
in Example 5 in paragraph (c)(2)(v)(E) of this
section, except in addition to the
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 request. 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, and ending
after August 12, 2018.
(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 301.6233(b)–1 is
added to read as follows:
§ 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
Internal Revenue Service (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
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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
§ 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, and ending
after August 12, 2018.
(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. 17. Section 301.6234–1 is added
to read as follows:
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§ 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
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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 § 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. In the case of a deposit made
under this section that is in an amount
in excess of the amount assessed against
the partnership (excess deposit), a
partnership may obtain a return of the
excess deposit by making a request in
writing in accordance with forms,
instructions, or other guidance
prescribed by the IRS.
(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, and ending
after August 12, 2018.
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(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 301.6235–1 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 (d) of this section (regarding
extensions), no partnership adjustment
(as defined in § 301.6241–1(a)(6)) for
any partnership taxable year may be
made after the later of the date that is—
(1) 3 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;
(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).
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(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
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.
(1) 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.
(2) 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.
(3) Example 3. The facts are the same as
in Example 2 in paragraph (e)(2) of this
section, except that on June 1, 2023, pursuant
to paragraph (d) of this section, PR signs an
agreement extending the period for making
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partnership adjustments under section
6235(a) 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 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.
(4) Example 4. The facts are the same as
in Example 3 in paragraph (e)(3) of this
section, 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.
(5) Example 5. The facts are the same as
in Example 4 in paragraph (e)(4) of this
section, 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 270day 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
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6567
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.
(6) Example 6. The facts are the same as
in Example 5 in paragraph (e)(5) of this
section, 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 27, 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 270day period described in paragraph (b)(1) of
this section expires on November 24, 2026.
Because November 24, 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 24, 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, and ending
after August 12, 2018.
(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 301.6241–1 is added
to read as follows:
§ 301.6241–1
Definitions.
(a) Definitions. For purposes of
subchapter C of chapter 63 of the
Internal Revenue Code (Code) and the
regulations in this part under sections
6221 through 6241 of the 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.
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(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 of the
Code, § 301.6225–1, and, if applicable,
§ 301.6225–2. 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)
of this section) or through a whollyowned entity disregarded as separate
from its owner for Federal income 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 required to file a return
under section 6031(a), an S corporation,
a trust (other than a wholly-owned trust
disregarded as separate from its owner
for Federal income 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
income tax purposes.
(6) Partnership adjustment—(i) In
general. The term partnership
adjustment means any adjustment to a
partnership-related item and includes
any portion of an adjustment to a
partnership-related item.
(ii) Partnership-related item. The term
partnership-related item means—
(A) Any item or amount with respect
to the partnership (as defined in
paragraph (a)(6)(iii) of this section)
which is relevant in determining the tax
liability of any person under chapter 1
of the Code (chapter 1) (as defined in
paragraph (a)(6)(iv) of this section);
(B) Any partner’s distributive share of
any such item or amount; and
(C) Any imputed underpayment
determined under subchapter C of
chapter 63 of the Code (subchapter C of
chapter 63).
(iii) Item or amount with respect to
the partnership. For purposes of
paragraph (a)(6)(ii) of this section, an
item or amount is with respect to the
partnership if the item or amount is
shown or reflected, or required to be
shown or reflected, on a return of the
partnership under section 6031 or the
forms and instructions prescribed by the
Internal Revenue Service (IRS) for the
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partnership’s taxable year or is required
to be maintained in the partnership’s
books or records. Items or amounts
relating to any transaction with, liability
of, or basis in the partnership are with
respect to the partnership only if those
items or amounts are described in the
preceding sentence. An item or amount
shown or required to be shown on a
return of a person other than the
partnership (or in that person’s books
and records) that results after
application of the Code to a partnershiprelated item based upon the person’s
specific facts and circumstances,
including an incorrect application of the
Code or taking into account erroneous
facts and circumstances of the partner,
is not an item or amount with respect
to the partnership. For instance, a
deduction shown on the return of a
partner that results after applying a
limitation under the Code (such as
section 170(b)) at the partner level to a
partnership-related item based on the
partner’s facts and circumstances is not
an item or amount with respect to the
partnership, even though the
corresponding expense on the return of
the partnership is an item or amount
with respect to the partnership.
Likewise, an amount on the return of a
partner that is after either an incorrect
application of a limitation under the
Code or based on facts and
circumstances of the partner that are
erroneous, or both (such as an incorrect
application of section 170(b)) at the
partner level to a partnership-related
item is not an item or amount with
respect to the partnership. Similarly, a
partner’s adjusted basis is not with
respect to the partnership because it is
an item or amount shown in the
partner’s books or records that results
after application of the Code to
partnership-related items taking into
account the facts and circumstances
specific to that partner.
(iv) Relevant in determining the tax
liability of any person under chapter 1.
For purposes of this section, an item or
amount with respect to the partnership
is relevant in determining the tax
liability of any person under chapter 1
without regard to the application of
subchapter C of chapter 63 and without
regard to whether such item or amount,
or an adjustment to such item or
amount, has an effect on the tax liability
of any particular person under
chapter 1.
(v) Examples of partnership-related
items. The term partnership-related item
includes—
(A) The character, timing, source, and
amount of the partnership’s income,
gain, loss, deductions, and credits;
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(B) The character, timing, and source
of the partnership’s activities;
(C) The character, timing, source,
value, and amount of any contributions
to, and distributions from, the
partnership;
(D) 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;
(E) The amount and character of
partnership liabilities and any changes
to those liabilities from the preceding
tax year;
(F) The category, timing, and amount
of the partnership’s creditable
expenditures;
(G) Any item or amount resulting
from a partnership termination;
(H) Any item or amount of the
partnership resulting from an election
under section 754;
(I) Partnership allocations and any
special allocations; and
(J) The identity of a person as a
partner in the partnership.
(vi) 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.
(A) Example 1. Partnership enters into a
transaction with A to purchase widgets for
$100 in taxable year 2020. 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 with
respect to Partnership because it is shown on
Partnership’s return and is relevant to
determining the liability of any person under
chapter 1 pursuant to paragraphs (a)(6)(iii)
and (iv) 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 (a)(6)(iii) of this
section because although the amount of
income relates to a transaction with
Partnership and Partnership is required to
show a deduction or expense related to the
payment to A, the amount of income to A is
not shown or required to be shown on
Partnership’s return. It is only required to be
shown of the return of A, a person other than
Partnership and requires determinations
about A’s reporting of the item. Accordingly,
the amount of income shown, or required to
be shown, by A on his return is not a
partnership-related item.
(B) Example 2. B loans Partnership $100 in
Partnership’s 2020 taxable year. Partnership
makes an interest payment to B in 2020 of
$5. 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 are with respect to Partnership
because they were shown on Partnership’s
return and are relevant in determining the
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liability of any person under chapter 1
pursuant to paragraphs (a)(6)(iii) and (iv) 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
(a)(6)(iii) of this section because although
they relate to a transaction with or liability
of Partnership and Partnership’s treatment of
the loan is shown on Partnership’s return, B’s
treatment of the loan and the amount of
interest income to B are shown, or required
to be shown, on the return of B, a person
other than Partnership and require
determinations about B’s reporting of the
items. Accordingly, the loan as treated by B
and the amount of interest income to B is not
a partnership-related item.
(C) Example 3. On its partnership return
for the 2020 tax year, Partnership reported
$200 of non-cash charitable contributions
related to its contribution of merchandise.
Partnership has two equal partners for the
2020 tax year: C and D, both individuals.
Partnership correctly reports $100 in noncash charitable contributions to both C and
D for the 2020 taxable year. On her return for
the 2020 taxable year, C erroneously deducts
the entire $100 of non-cash charitable
contributions, even though C’s deduction for
charitable contributions would be limited by
section 170(b)(1)(A) to $50 because of C’s
income. The $100 of non-cash charitable
contribution reported by Partnership to C is
a partnership-related item. However, the
amount of the deduction taken by C on her
return for 2020 and the amount of that
deduction allowed after application of the
limitation contained in section 170(b)(1)(A)
to the $100 in non-cash charitable
contributions reported by Partnership to C is
not a partnership-related item under
paragraph (a)(6)(ii) of this section because it
is not with respect to the partnership.
(D) Example 4. The facts are the same as
in Example 3 in paragraph (a)(6)(vi)(C) of this
section. On his return for the 2020 taxable
year, D also deducts the entire $100 in
charitable contributions but treats the
charitable contributions as if they were cash
contributions, instead of non-cash
contributions. D does not file a notice of
inconsistent treatment under section 6222. If
D had treated the $100 in charitable
contributions as non-cash contributions, D’s
deduction for the charitable contributions
from Partnership would have be limited by
section 170(b)(1)(A) due to D’s income. D’s
deduction of the $100 in charitable
contributions is an item or amount shown on
D’s return, derives from the charitable
contributions reported by the partnership,
and is subject to the application of the
limitation under section 170(b)(1)(A).
Therefore, D’s deduction is not an item or
amount with respect to the partnership. The
charitable contribution reported by the
partnership and its character are items or
amounts with respect to the partnership
pursuant to paragraph (a)(6)(iii) of this
section. An adjustment to the character of the
contributions is a partnership adjustment.
Because D’s treatment of the charitable
contributions is inconsistent with the
treatment of that item by Partnership on its
partnership return, the IRS may make that
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partnership adjustment in a proceeding with
respect to D and determine and assess any
underpayment that results from conforming
D’s treatment to the treatment of the
contributions by Partnership and applying
the limit in section 170(b)(1)(A). See
§ 301.6222–1(b).
(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 paragraph (a)(6)(ii) of this
section) 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, and ending
after August 12, 2018.
(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 301.6241–2 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
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—
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(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, and ending
after August 12, 2018.
(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 301.6241–3 is added
to read as follows:
§ 301.6241–3 Treatment where a
partnership ceases to exist.
(a) Former partners take adjustments
into account—(1) In general. If the
Internal Revenue Service (IRS)
determines that any partnership
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(including a partnership-partner as
defined in § 301.6241–1(a)(7)) ceases to
exist (as defined in paragraph (b) 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) Cease to exist defined—(1) In
general. If 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. A
failure by the IRS to send a notification
under this paragraph (b)(1) to a former
partner of the partnership does not
invalidate the determination by the IRS
that the partnership ceases to exist. If an
audited partnership (as defined in
§ 301.6226–3(e)(1)) ceases to exist, the
IRS will also notify the partnership
representative for the reviewed year. For
purposes of this section, a partnership
ceases to exist if the IRS makes a
determination that a partnership ceases
to exist because:
(i) The partnership terminates within
the meaning of section 708(b)(1); or
(ii) The partnership 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.
(2) Exceptions. For purposes of this
section, the IRS will not determine that
a partnership ceases to exist solely
because the partnership has—
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(i) A valid election under section 6226
in effect with respect to any imputed
underpayment (as defined in
§ 301.6241–1(a)(3));
(ii) 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
(iii) Not paid any amount required to
be paid under subchapter C of chapter
63.
(3) 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)(1) of
this section that the partnership ceases
to exist.
(4) 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
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(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, for a partnership that
has ceased to exist, the partners of the
partnership during the adjustment year
(as defined in § 301.6241–1(a)(1)) that
corresponds to the reviewed year for
which the adjustments were made.
(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
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 last partnership taxable year
for which the a 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) before the
adjustment year and files a final
partnership return for the partnership
taxable year of such partnership, the
former partners for purposes of this
section are the partners of the
partnership during the partnership
taxable year for which a final
partnership return is filed.
(e) Taking adjustments into account—
(1) In general. For purposes of
paragraph (a) of this section, a former
partner of a partnership that ceases to
exist takes a partnership adjustment into
account as if the partnership had made
an election under section 6226
(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.
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(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).
(1) 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
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payment. On September 1, 2029, the IRS
determines Partnership ceases to exist for
purposes of this section because the
Partnership does not have the ability to pay
under paragraph (b)(1)(ii) 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.
(2) 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 P does not have the ability to pay
under paragraph (b)(1)(ii) 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)(1)(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, and ending
after August 12, 2018.
(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 301.6241–4 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 (Code) for
any payment required to be made by a
partnership under subchapter C of
chapter 63 of the Code (subchapter C of
chapter 63). Payment by a partnership of
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6571
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, and ending
after August 12, 2018.
(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 301.6241–5 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) 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–
1(a)(6)(ii)) 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 for such
taxable year.
(b) Partnership return filed but no
entity found to exist. Paragraph (a) of
this section also applies where a
partnership return is filed for a taxable
year, but the IRS determines that no
entity existed at all for such taxable
year. For purposes of applying
paragraph (a) of this section, the
partnership return is treated as if it were
filed by an entity.
(c) Exceptions. Paragraph (a) of this
section does not apply to—
(1) 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 valid
section 761(a) election is made
(regarding election out of subchapter K
of chapter 1 of the Internal Revenue
Code for certain unincorporated
organizations).
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(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, and ending
after August 12, 2018.
(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 301.6241–6 is added
to read as follows:
§ 301.6241–6 Coordination with other
chapters of the Internal Revenue Code.
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(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
§ 301.6241–1(a)(6)(ii)) 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 paragraph (a) of
this section 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.
(i) 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
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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
§ 301.6241–1(a)(6)(ii). 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.
(ii) 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
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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 § 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
the Code, but does not include section
1443(b) of the Code.
(iii) Chapter 4. The term chapter 4
means sections 1471 through 1474 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
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under chapter 3 or chapter 4 on the
amount of any adjustment set forth in
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
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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 § 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); and 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
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6573
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, and ending
after August 12, 2018.
(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.
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
Approved: December 17, 2018.
David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2018–28140 Filed 2–21–19; 11:15 am]
BILLING CODE 4830–01–P
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[Federal Register Volume 84, Number 39 (Wednesday, February 27, 2019)]
[Rules and Regulations]
[Pages 6468-6573]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28140]
[[Page 6467]]
Vol. 84
Wednesday,
No. 39
February 27, 2019
Part II
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 301
Centralized Partnership Audit Regime; Final Rule
Federal Register / Vol. 84 , No. 39 / Wednesday, February 27, 2019 /
Rules and Regulations
[[Page 6468]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9844]
RIN 1545-BO03; 1545-BO04
Centralized Partnership Audit Regime
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
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SUMMARY: This document contains final regulations implementing the
centralized partnership audit regime. These final regulations affect
partnerships for taxable years beginning after December 31, 2017 and
ending after August 12, 2018, as well as partnerships that make the
election to apply the centralized partnership audit regime to
partnership taxable years beginning on or after November 2, 2015, and
before January 1, 2018.
DATES:
Effective date: These regulations are effective on February 27,
2019.
Applicability Date: For dates of applicability, see Sec. Sec.
301.6221(a)-1(c); 301.6222-1(e); 301.6225-1(i); 301.6225-2(g);
301.6225-3(e); 301.6226-1(g); 301.6226-2(h); 301.6226-3(i); 301.6227-
1(h); 301.6227-2(e); 301.6227-3(d); 301.6231-1(h); 301.6232-1(f);
301.6233(a)-1(d); 301.6233(b)-1(e); 301.6234-1(f); 301.6235-1(f);
301.6241-1(b); 301.6241-2(b); 301.6241-3(g); 301.6241-4(b); 301.6241-
5(d); 301.6241-6(c).
FOR FURTHER INFORMATION CONTACT: Concerning the 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 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 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 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
regulations relating to chapters 3 and 4 of the Internal Revenue Code
(other than section 1446), Subin Seth of the Office of Associate Chief
Counsel (International), (202) 317-5003; and concerning the regulations
relating to section 1446, Ronald M. Gootzeit of the Office of Associate
Chief Counsel (International), (202) 317-4953 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regulations under sections 6221
through 6241 of the Internal Revenue Code (Code) to amend the Procedure
and Administration Regulations (26 CFR part 301) to implement the
centralized partnership audit regime enacted by section 1101 of the
Bipartisan Budget Act of 2015, Public Law 114-74 (BBA), as amended by
the Protecting Americans from Tax Hikes Act of 2015, Public Law 114-
113, div Q (PATH Act), and sections 201 through 207 of the Tax
Technical Corrections Act of 2018, contained in Title II of Division U
of the Consolidated Appropriations Act of 2018, Public Law 115-141
(TTCA).
Section 1101(a) of the BBA removed former subchapter C of chapter
63 of the Code effective for partnership taxable years beginning after
December 31, 2017. Former subchapter C of chapter 63 of the Code
contained the unified partnership audit and litigation rules enacted by
the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248
(TEFRA) 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 determines adjustments and,
in general, determines, assesses, and collects tax at the partnership
level. Section 1101(g) of the BBA set forth the effective dates for
these statutory amendments, which are effective generally for returns
filed for partnership taxable years beginning after December 31, 2017.
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 Department of the Treasury (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 alternative to payment of the imputed
underpayment by the partnership, 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 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 60144) 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
[[Page 6469]]
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.
On August 17, 2018, the Treasury Department and the IRS published
in the Federal Register (83 FR 41954) a notice of proposed rulemaking,
notice of public hearing, and withdrawal and partial withdrawal of
notices of proposed rulemaking (REG-136118-15) (August 2018 NPRM) that
withdrew the regulations proposed in the June 2017 NPRM, the November
2017 NPRM, the December 2017 NPRM, and the February 2018 NPRM, and
proposed regulations reflecting the technical corrections enacted in
the TTCA as well as other changes as discussed in the preamble to the
August 2018 NPRM. Written public comments were received in response to
the August 2018 NPRM, and a public hearing regarding the proposed
regulations was held on October 9, 2018.
In the preambles to the June 2017 NPRM and November 2017 NPRM,
comments were requested regarding certain international and tax-exempt
aspects of the centralized partnership audit regime. No comments were
received in response to these requests, other than a comment regarding
fiduciary issues under title I of the Employee Retirement Income
Security Act of 1974 (ERISA), which is discussed later in section 3.B.i
of the Summary of Comments and Explanation of Revisions. The Treasury
Department and IRS will still consider comments on whether any issues
related to international rules and tax-exempt partners warrant guidance
either under the centralized partnership audit regime provisions or
under the relevant provisions of the Code directly related to those
areas.
After careful consideration of all written public comments received
in response to the June 2017 NPRM, the December 2017 NPRM, and the
August 2018 NPRM, as well as statements made during the public hearings
for the June 2017 NPRM and the August 2018 NPRM, the portions of the
August 2018 NPRM described in this preamble are adopted as amended by
this Treasury Decision. Comments received in response to the February
2018 NPRM or that otherwise concern basis and tax attribute rules under
Sec. 301.6225-4 or Sec. 301.6226-4 will be addressed in future
guidance. For purposes of this preamble, the regulations proposed in
the June 2017 NPRM, the November 2017 NPRM, and the December 2017 NPRM
are collectively referred to as the ``former proposed regulations.''
The regulations proposed in the August 2018 NPRM are referred to as the
``proposed regulations.''
Summary of Comments and Explanation of Revisions
Thirty written comments were received in response to the June 2017
NPRM. Five statements were provided at the public hearing held on
September 18, 2017. Four written comments were received in response to
the December 2017 NPRM. No public hearing was held. Eight written
comments were received in response to the August 2018 NPRM, and one
statement was provided at the public hearing held on October 9, 2018.
All of these comments (both written and provided orally at the public
hearings) have been considered, and revisions to the regulations were
made in response to the comments. The written comments received are
available for public inspection at www.regulations.gov or upon request.
In addition to changes in response to the comments, editorial
revisions were also made to correct typographical errors, grammatical
mistakes, and erroneous cross-references. Revisions were also made to
clarify language in the proposed regulations that was potentially
unclear. Unless specifically described in this Summary of Comments and
Explanation of Revisions, such revisions were not intended to change
the meaning of the language that was revised. All applicability dates
were revised to provide that the final regulations will not apply to
taxable years that ended before the date the August 2018 NPRM was filed
with the Federal Register. To the extent comments recommended as a
general matter that the regulations take into account the TTCA
amendments, those comments were adopted as described in this Summary of
Comments and Explanation of Revisions.
1. Scope of the Centralized Partnership Audit Regime
Three comments were received regarding the scope of the centralized
partnership audit regime. All of the comments concerned former proposed
Sec. 301.6221(a)-1, which was issued before the TTCA was enacted. No
comments were received on proposed Sec. 301.6221(a)-1 as revised
subsequent to the TTCA in the August 2018 NPRM.
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 shall be determined at the partnership level. Former
proposed Sec. 301.6221(a)-1(b)(1)(i) had 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 and any information contained in the partnership's books
and records for the taxable year. One comment stated the definition
under former proposed Sec. 301.6221(a)-1(b)(1)(i) included items on
the partnership return or in the partnership's books and records
regardless of whether (i) such items or information would affect the
income that the partnership reports or (ii) the particular tax
characteristics of the separate partners would affect the ultimate tax
liability. The comment expressed concern that, by broadly defining the
scope of the centralized partnership audit regime, the proposed
regulations would expand the number of partnerships and partners that
encounter differences between the correct tax they would have paid if
they had properly reported, and the amount of the imputed underpayment.
No changes to the regulations were made in response to this comment.
The TTCA amended section 6221(a) by replacing the phrase ``items of
income, gain, deduction, loss or credit of a partnership for a
partnership taxable year (and any partner's distributive share
thereof)'' with the term ``partnership-related item.'' The TTCA added a
definition of ``partnership-related item'' to section
[[Page 6470]]
6241(2). The August 2018 NPRM adopted the TTCA amendments to section
6221(a) and 6241 by moving the majority of the regulation text under
former proposed Sec. 301.6221(a)-1 to the definition of ``partnership-
related item'' under proposed Sec. 301.6241-6. Because of these
changes, the comment is generally no longer applicable to this section
of the regulations.
In addition, the TTCA amendments address the comment's first
concern that the scope of former proposed Sec. 301.6221(a)-1(b)(1)(i)
was overly broad in that it was delineated without regard to whether
items or information adjusted at the partnership level affect the
income of the partnership. Section 6241(2)(B) broadly defines a
partnership-related item as any item or amount with respect to the
partnership which is relevant in determining the tax liability of any
person under chapter 1 of the Code and any partner's distributive share
thereof. Section 6241(2)(B). Nothing within that definition limits the
term partnership-related item to income reported by the partnership. To
the contrary, partnership-related items are any items with respect to
the partnership that are relevant to determining any person's chapter 1
tax, which could include partnership expenses, credits generated by
partnership activity, assets and liabilities of the partnership, and
any other items concerning the partnership that are relevant to
someone's chapter 1 tax, irrespective of the impact such items have on
the partnership's income.
Furthermore, the core feature of the centralized partnership audit
regime is to provide a centralized method of examining items of a
partnership. Adjusting items on a partnership's return or in the
partnership's books and records, regardless of their effect on
partnership income, in a centralized partnership proceeding at the
partnership level is not only consistent with this centralized
approach, but it also results in efficiencies because one proceeding
can be conducted that will bind all partners and the partnership. See
section 6223(b). Nothing in the statute requires only items that affect
the partnership's income, as reported on the partnership's return, to
be adjusted at the partnership level.
Regarding the comment's second concern that an imputed underpayment
is determined without regard to partners' tax characteristics and that
the imputed underpayment amount differs from the amount of tax the
partners would have paid had the items been reported correctly, those
concerns are addressed in section 3.A. of this Summary of Comments and
Explanation of Revisions.
Former proposed Sec. 301.6221(a)-1(b)(1)(i) provided as an example
of an ``item of income, gain, loss, deduction, or credit'' any items
related to transactions between a partnership and any person including
disguised sales, guaranteed payments, section 704(c) allocations, and
transactions to which section 707 applies. Former proposed Sec.
301.6221(a)-1(b)(1)(i)(H). One comment suggested that this provision
inappropriately included partner items such as a disguised fee under
section 707(a)(2)(A) and the gain or loss a partner may realize from a
disguised sale under section 707(a)(2)(B). The comment recommended
revising the regulations to refer to ``items of a partnership related
to . . . transactions to which section 707 applies.'' Similarly,
another comment expressed concern about situations where a partner was
not acting in the partner's capacity as a partner, but rather as a
counterparty to a transaction with the partnership. The comment
suggested that the regulations clarify that a final determination of a
transaction between a partnership and a partner following an
examination of the partnership is not binding on any third person,
including a partner not acting in its capacity as a partner and who was
not a party to the examination.
These comments are addressed by the final regulations under Sec.
301.6241-1(a)(6) regarding the definition of partnership-related item.
Proposed Sec. 301.6241-6(b)(4) and (5) defined the phrase ``item or
amount with respect to the partnership'' to include an item or amount
that relates to a transaction with the partnership by a partner acting
in its capacity as a partner or by an indirect partner acting in its
capacity as an indirect partner as well as an item or amount relating
to a transaction that is described in section 707(a)(2), 707(b), or
707(c). Accordingly, under the proposed regulations if an item or
amount related to a transaction that is described in section 707(a)(2),
707(b), or 707(c) and was relevant in determining chapter 1 tax, that
item was a partnership-related item and must be determined at the
partnership level.
As described more fully in section 1.B., the final regulations
clarify that items or amounts relating to transactions of the
partnership are items or amounts with respect to the partnership only
if those items or amounts are shown, or required to be shown, on the
partnership return or are required to be maintained in the
partnership's books and records. The final regulations further clarify
that items or amounts shown, or required to be shown, on a return of a
person other than the partnership (or in that person's books and
records) that result after application of the Code to a partnership-
related item and that take into account the facts and circumstances
specific to that person are not partnership-related items and,
therefore, are not determined at the partnership level under the
centralized partnership audit regime.
The changes in the final regulations to the definition of
partnership-related item address the concerns raised by the comment.
First, Sec. 301.6241-1(a)(6) provides that only items or amounts
reflected, or required to be reflected on the partnership's return or
in its books and records are with respect to the partnership. If such
items are relevant to determining chapter 1 tax such items are
partnership-related items. This rule applies equally to items or
amounts relating to any transaction with, liability of, or basis in the
partnership. Second, Sec. 301.6241-1(a)(6) further provides that items
reflected, or required to be reflected on the return of a person other
than the partnership or in that person's books and records that result
after application of the Code to a partnership-related item are not
with respect to a partnership and, thus, not partnership-related items.
Accordingly, only items of the partnership, as suggested by the
comment, are partnership-related items under Sec. 301.6241-1(a)(6).
Proposed Sec. 301.6221(a)-1(a) provided that any consideration
necessary to make a determination at the partnership level under the
centralized partnership audit regime, including the period of
limitations on making partnership adjustments under section 6235 or
facts necessary to calculate an imputed underpayment under section 6225
were determined at the partnership level. The final regulations under
Sec. 301.6221(a)-1(b) retain this concept, but with revised language.
The final regulations provide that any legal or factual determinations
underlying any adjustment or determination made under the centralized
partnership audit regime are also determined at the partnership level
under the centralized partnership audit regime. For instance, such
determinations include the period of limitations on making adjustments
under the centralized partnership audit regime and any determinations
necessary to calculate the imputed underpayment or any modification of
the imputed underpayment under section 6225.
After consideration, the Treasury Department and the IRS have
concluded that the phrase ``legal and factual determinations underlying
an
[[Page 6471]]
adjustment or determination'' instead of the phrase ``any consideration
necessary to make a determination at the partnership level'' more
clearly and accurately reflects the rule that facts and legal
conclusions that underlie adjustments to partnership-related items,
tax, and penalties made at the partnership level are also determined at
the partnership level. The revised language more clearly describes the
rule and provides taxpayers with more definitive guidance regarding the
items determined at the partnership level. Additionally, this language
is consistent with language used in proposed Sec. 301.6241-6(b)(8),
which was removed as described in section 2 of this Summary of Comments
and Explanation of Revisions.
Lastly, the final regulations remove the list of cross-references
from the end of proposed Sec. 301.6221(a)-1(a). The TTCA amended
section 6221(a) to provide that adjustments to partnership-related
items are determined at the partnership level ``except to the extent
otherwise provided in'' subchapter C of chapter 63. Because the
statutory language is clear that there are exceptions within subchapter
C of chapter 63 to the general rule under section 6221(a) and Sec.
301.6221(a)-1, the list of cross-references from proposed Sec.
301.6221(a)-1(a) was no longer necessary.
A. Penalty Defenses
Five comments were received with respect to former proposed Sec.
301.6221(a)-1(c), which provided that any defense to any penalty,
addition to tax, or additional amount must be raised by the partnership
in a partnership-level proceeding under the centralized partnership
audit regime, regardless of whether the defense relates to facts and
circumstances relating to a person other than the partnership. Once the
adjustments determined in the partnership-level proceeding became
final, no defense to any penalty determined could be raised or taken
into account. Former proposed Sec. 301.6221(a)-1(c).
Several comments stated that the rule under former proposed Sec.
301.6221(a)-1(c) was inequitable to partners because, among other
reasons, partners had no control over whether the partnership
representative would raise a partner-specific defense, especially in
the case of indirect partners who are less directly connected to the
partnership representative. Some comments recommended the regulations
clarify how partner-level defenses would be raised in the partnership-
level proceeding and how decisions regarding those penalty defenses
would be communicated to partners. Other comments suggested that
partners should be able to raise their own partner-level defenses. In
response to these comments, former proposed Sec. 301.6221(a)-1(c) was
removed from the proposed regulations in the December 2017 NPRM. See
section 3 of the preamble to the December 2017 NPRM. The December 2017
NRPM also proposed regulations under sections 6225 and 6226 (former
proposed Sec. Sec. 301.6225-2(d)(2)(viii) and 301.6226-3(i)) which
allowed partners to raise their own partner-level defenses at the time
partners took into account the partnership adjustments determined at
the partnership level (either through the modification process or as
part of the election under section 6226). For further discussion of the
rules regarding partner-level defenses under sections 6225 and 6226,
see sections 3.D. and 4.C.ii.I. of this preamble. See also section 8.A.
of this preamble regarding section 6233(a).
B. Partnership-Related Item
Proposed Sec. 301.6241-6(a) defined the term ``partnership-related
item'' as any item or amount with respect to the partnership which is
relevant to 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) provided that an item or amount is with
respect to the partnership without regard to whether the item or amount
appeared on the partnership return if the item or amount was described
in one of eight categories. Two categories described items or amounts
that are shown or reflected, or required to be shown or reflected, on a
return of the partnership under section 6031 or are in the
partnership's books and records. The other categories described items
or amounts relating to certain transactions with the partnership, items
or amounts relating to liabilities of the partnership provided the item
or amount was reported by a partner, and items or amounts relating to
basis in the partnership. Imputed underpayments and any legal or
factual determinations necessary to make an adjustment to items or
amounts described in the other categories were also defined as items or
amounts with respect to the partnership. Proposed Sec. 301.6241-
6(b)(1) through (8).
After careful consideration, the Treasury Department and the IRS
have revised the definition of ``item or amount with respect to the
partnership.'' First, the final regulations remove the language
``without regard to whether or not such item or amount appears on the
partnership's return'' from proposed Sec. 301.6241-6(b). That phrase
derived from the parenthetical in section 6241(2)(B)(i) that follows
``item or amount with respect to the partnership.'' The Treasury
Department and the IRS have determined that the parenthetical language
describes items or amounts that appear on the partnership return, items
or amounts that were required to appear on the return but actually did
not, and items or amounts that factor into the determination of items
or amounts that do appear on the partnership return. The Treasury
Department and the IRS have concluded that this parenthetical does not
extend the concept of ``with respect to the partnership'' to items or
amounts that are reported by third parties and that are otherwise not
defined as partnership-related items in these final regulations. See
Sec. 301.6241-1(a)(6)(vi)(A) and (B).
Second, the final regulations replace the list of eight categories
of items or amounts that were with respect to the partnership with a
single, streamlined paragraph, Sec. 301.6241-1(a)(6)(iii) that
includes all the items and amounts from the prior list, except as
described in this section of this preamble. Third, the definition of
partnership-related item was moved from proposed Sec. 301.6241-6 and
placed under the definition of ``partnership adjustment'' in Sec.
301.6241-1(a)(6) to more closely track the statutory structure of
section 6241(2).
The final regulations under Sec. 301.6241-1(a)(6)(iii) maintain
the rule from the proposed regulations that items or amounts shown or
reflected, or required to be shown or reflected, on the return of the
partnership are items or amounts with respect to the partnership. The
final regulations also clarify that items or amounts in the
partnership's book or records are items or amounts with respect to the
partnership if those items or amounts are ``required to be maintained''
in the partnership's books and records. The phrase ``required to be
maintained'' is added to account for items that may be maintained in
the partnership's books and records on a voluntary basis. For example,
a partnership may choose to maintain the outside basis of each of its
partners in its books and records, even though the Code does not
require this information be maintained by the partnership. The rule
make clears that the voluntary recording of an item in the
partnership's books is not determinative of the meaning of the phrase
``item or amount with respect to the partnership.'' A partnership
cannot convert an item or amount that is not with respect to the
[[Page 6472]]
partnership into an item or amount that is with respect to the
partnership merely by including that item or amount in the
partnership's books and records. This rule provides consistency among
partnerships and more certainty regarding what items in the books and
records of a partnership constitute items or amounts with respect to
the partnership.
The final regulations do not retain the separate categories of
items relating to transactions with, liabilities of, and basis in the
partnership. Instead, the final regulations adopt a streamlined
approach and provide that those items are only with respect to the
partnership if those items are reflected, or required to be reflected,
on the partnership's return or required to be maintained in its books
and records. The separate treatment under the proposed regulations for
these types of items and amounts was duplicative. Items or amounts
relating to transactions with, liabilities of, and basis in the
partnership are items or amounts shown or reflected, or would be
required to be shown or reflected, on the partnership return or
required to be maintained in the partnership's books and records.
Accordingly, describing separate categories for such items was
unnecessary and potentially confusing.
Under Sec. 301.6241-1(a)(6)(iii), an item or amount is with
respect to the partnership only if the item or amount is shown or
reflected, or required to be shown or reflected, on the partnership
return or required to be maintained in the partnership's books and
records. Consistent with that interpretation, the final regulations
provide an item or amount relating to transactions with, liabilities
of, and basis in the partnership is with respect to the partnership
only if the item or amount is reported, or required to be reported, on
the partnership return or is required to be maintained in the
partnership's books and records.
The term partnership-related item includes a partner's distributive
share of items or amounts that are with respect to the partnership
which are relevant in determining the chapter 1 tax of any person.
Section 6241(2)(B)(ii). In taking into account the partner's
distributive share of partnership-related items, a partner must apply
the provisions of the Code to each partnership-related item to compute
the partner's ultimate tax liability. The application of the Code to
the partner's share of partnership-related items requires taking into
account facts and circumstances that are unique to a particular
partner. Generally speaking, those facts and circumstances are known
only by the partner, are not known by the partnership, and are based on
information only within the partner's control and outside of the
partnership's control.
In an examination of items on a partner's return, the IRS generally
needs information pertaining to the partner's specific facts and
circumstances to determine the correctness of the items. The partner
whose items are at issue is normally the best source for that type of
information. While a partnership may possess some information about a
particular partner's facts and circumstances, obtaining information
from the partnership is generally not as efficient as obtaining
information from the partner. Obtaining such information from the
partner also preserves the privacy interests of the partner. Therefore,
from both a taxpayer and tax administration standpoint, an examination
of items for which application of the Code depends on a partner's
particular facts and circumstances is, in general, best performed at
the partner level, rather than the partnership level.
Under the TEFRA procedures, these types of items were considered
affected items and adjustments to those items were computational
adjustments. 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. 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). One way to achieve a
sufficiently broad scope is to attempt to define the term
``partnership-related item'' to include those items that would have
been partnership items, affected items, and computational adjustments
under TEFRA. For the following reasons, however, this approach was not
adopted.
The centralized partnership audit regime is a fundamentally
distinct system from TEFRA. While under both sets of rules adjustments
are made at the partnership level and those adjustments are binding on
partners, the framework for assessing and collecting tax resulting from
those adjustments is significantly different. Under TEFRA, tax
attributable to partnership items determined at the partnership level
and tax attributable to affected items was assessed against the
partners of the partnership through computational adjustments made by
the IRS with respect to the partner. Computational adjustments were
made either by mailing a notice of deficiency to the partner if factual
determinations were necessary at the partner level or by directly
assessing tax against the partner. The tax was assessed with respect to
the year that was audited by the IRS, and assessments were required to
be made within one year of the completion of the partnership-level
proceeding.
Under the centralized partnership audit regime, adjustments to
partnership-related items are similarly determined at the partnership
level. In stark contrast to the TEFRA procedures, however, the tax
attributable to those adjustments is also assessed and collected at the
partnership level in the form of an imputed underpayment determined
pursuant to section 6225. An imputed underpayment is assessed as if it
were a tax imposed for the adjustment year, generally the year in which
the adjustments are finally determined, instead of the year that was
subject to examination. Section 6225(d). The partnership, not the
partners, is liable for the imputed underpayment. A partnership may
elect the alternative to payment of the imputed underpayment under
section 6226 and ``push out'' the adjustments determined at the
partnership level, in which case the tax attributable to the
adjustments is assessed and collected from the partnership's partners.
Unlike the TEFRA procedures, however, under the push out process,
assessment and collection is initiated by the partner, rather than by
the IRS, by the partner taking into account the partnership adjustments
and self-reporting any tax due on the partner's next filed return,
alleviating both the administrative and timing issues that arose in
TEFRA. See section 2.A of the preamble to the June 2017 NPRM.
When calculating an imputed underpayment based on adjustments
determined at the partnership level, taxpayer favorable adjustments are
generally disregarded and the highest rate of tax is applied. This
formula may produce an amount that is larger than the cumulative amount
of tax the partners would have paid had the partners taken the
adjustments into account separately, but it also relieves the IRS of
the obligation to account for specific partner facts and circumstances
when initially determining the imputed underpayment amount. During the
modification phase, a partnership may, at its option, request that the
imputed underpayment be modified to take into account partner tax
attributes and facts and circumstances. See section 3.B. for further
discussion.
[[Page 6473]]
When taking into account adjustments under section 6226, a partner
determines the increase or decrease in tax that would have occurred if
the adjustments were taken into account for the partner's tax year
correlating to the year that was audited. For intervening years, any
year between the audited year and the current year, the partner must
determine the effect on tax attributes of the adjustments and the
resulting increase or decrease that would have occurred for those years
as well. The partner then adjusts her tax for the current year by the
aggregate tax that would have resulted had the adjustments been
properly taken into account. Under TEFRA, it was the IRS's burden to
determine tax at the partner level. The centralized partnership audit
regime, under section 6226, shifts that burden from the IRS to the
partner. As a result, it is neither necessary nor efficient for the IRS
to determine at the partnership level the facts and circumstances
specific to a partner in order for that partner to determine the proper
amount of tax in the case of a push out.
The rules for calculating an imputed underpayment under section
6225 and the computation rules under section 6226 are sufficiently
broad to ensure that the tax attributable to items that would have been
partnership items, affected items, and computational adjustments under
the TEFRA is collected under the centralized partnership audit regime.
When the partnership pays an imputed underpayment, the application of
limitations and restrictions is assumed and favorable adjustments are
disregarded unless a partnership demonstrates that partner tax
attributes should override those assumptions. In this way, the imputed
underpayment determination, including any modifications, sufficiently
accounts for those types of items that would have been affected items
or computational adjustments under TEFRA. Similarly, in the case of an
election under section 6226, the re-computation process necessarily
involves the application of items that would have been affected items
or computational adjustments.
Because both the imputed underpayment rules and the section 6226
rules sufficiently address items that would have been partnership
items, affected items, and computational adjustments, it is both
unnecessary and over-inclusive to define partnership-related item to
encompass all of those items. Accordingly, the final regulations
clarify that the term partnership-related item does not include items
or amounts that would have been TEFRA affected items or computational
adjustments. The final regulations do this by defining ``with respect
to the partnership'' to exclude items or amounts shown, or required to
be shown, on a return of a person other than the partnership (or in
that person's books and records) that result after application of the
Code to a partnership-related item and that take into account the facts
and circumstances specific to that person. Because these items and
amounts are not with respect to the partnership, they are not
partnership-related items the IRS must adjust at the partnership level.
Two examples were added to the final regulations under Sec. 301.6241-
1(a)(6)(vi) to illustrate this rule.
The definition of ``with respect to the partnership,'' and by
extension partnership-related item, under the final regulations
preserves the centralized nature of the proceeding with respect to the
partnership. During the partnership level proceeding under the
centralized partnership audit regime, the IRS adjusts items that are
germane to the partnership as an entity--that is, items reported by the
partnership on its return or items in its books and records generally
used for purposes of completing the return. The partnership has access
to this information, and it is therefore, in general, most efficient to
obtain this information from the partnership in the partnership level
proceeding.
This rule also protects the tax and privacy interest of partners.
Under section 6223, partners are bound by actions taken by the
partnership in the partnership proceeding and by any final decision in
the partnership proceeding. Unlike under TEFRA, individual partners do
not have a right to participate in the partnership level administrative
or judicial proceeding. If items based on the application of the Code
to a particular partner based on that partner's facts and circumstances
were items required to be determined at the partnership level, the
partner may be unable to dispute adjustments to those items. And even
if the partner were able to dispute adjustments to those items, the
partner would need to divulge private information in a proceeding in
which the partnership was the party, not the partner itself.
In addition, a rule that would require that such items and amounts
be determined at the partnership level raises significant
administrative concerns for the IRS. In general, the partnership would
in most cases lack the facts necessary to determine items or amounts
that depend on the facts and circumstances of the partners. By
necessity, the IRS would be required to involve the partners in the
examination to the extent the partner's items and amounts were at
issue. Requiring the IRS to involve potentially the many partners in
the entity level examination of the partnership would undermine the
efficiencies of the centralized partnership audit regime's concept of
the partnership representative and the binding nature of the
partnership representative on the outcome of the entity level
examination. Further, if the IRS did not examine all of the various
items or amounts on the partners' returns during the partnership level
proceeding, the IRS would, for each of the partners' items and amount
that were also partnership-related items, be precluded from adjusting
those items at the partner level outside of the centralized partnership
audit regime. This would lead to an unnecessary expansion of
partnership-level proceedings to encompass what could more simply and
efficiently be resolved at the partner level for one or a small group
of partners.
i. Comments Concerning Partnership-Related Item
One comment recommended that all partners should be audited as a
group, but only about their financial involvement within the scope of
the partnership. According to the comment, outside interests and income
should not be determined at the partnership level. Although it is not
entirely clear what the comment includes in the phrases ``financial
involvement within the scope of the partnership'' and ``outside
interests and income'', the Treasury Department and the IRS understand
this comment to be a request to limit the scope of the items that are
``with respect to the partnership'' for purposes of this section.
Another comment suggested that the scope of the term ``partnership-
related item'' should not be unreasonably broad, particularly with
respect to partner-level items where the underlying issue is primarily
of interest to the partner and not the partnership. The comment
expressed concern that the partnership could have little interest in
disputing a proposed adjustment that would have little impact to the
partnership but could have a dramatic effect on a particular partner.
These comments were adopted as reflected in the changes to the
definition of ``with respect to the partnership'' described in this
section of this preamble. Under the final regulations, outside
interests and income and partner-level items are not ``with respect to
the partnership'' to the extent those are not items or amounts
reflected, or required to be reflected, on the
[[Page 6474]]
partnership return or required to be maintained in the partnership's
books and records. In addition, the items or amounts that are ``with
respect to the partnership'' as defined in Sec. 301.6241-1(a)(6)(iii)
are generally items concerning the partners' financial involvement
within the scope of the partnership. Accordingly, adjustments to items
concerning the partners' financial involvement within the scope of the
partnership would generally be determined at the partnership level, and
adjustments to items involving outside interests and income or partner-
level items that result after application of the Code to a partnership-
related item and that take into account facts and circumstances
specific to the partner, to the extent provided for in this section,
are not determined at the partnership level under the centralized
partnership audit regime.
In addition to the revisions described earlier in this section of
this preamble, the term imputed underpayment was moved from the
definition of ``item or amount is with respect to the partnership'' to
the definition of partnership-related item under Sec. 301.6241-
1(a)(6)(ii). This change clarifies that an imputed underpayment is
always a partnership-related item. First, an imputed underpayment is a
creation of the centralized partnership audit regime and can only arise
under the centralized partnership audit regime. See sections 6225,
6226, and 6227. Second, the statute expressly defines an imputed
underpayment as an item or amount that is with respect to the
partnership. Section 6241(2)(B)(i). Third, an imputed underpayment is
relevant in determining the liability of any person under chapter 1, as
defined in Sec. 301.6241-1(a)(6)(iv), because payment of the imputed
underpayment by the partnership relieves the partners of any chapter 1
liability attributable to the reviewed year partnership adjustments.
2. Partner's Return Must Be Consistent With Partnership Return
Five comments were received concerning section 6222, regarding the
requirement that a partner's return be consistent with the partnership
return. The comments covered the following topics: Inconsistent
treatment in the case of an amended return, an administrative
adjustment request, or where no partnership return is filed; the form
and method for identifying inconsistent treatment; proceedings to
adjust identified, inconsistently reported items; and the election
regarding consistent treatment with a schedule furnished to the partner
by the partnership. In addition to responding to these comments, this
section of the preamble describes changes to the language of Sec.
301.6222-1(a)(2) regarding partners that are partnerships with an
election in effect under section 6221(b).
A. Inconsistent Treatment on an Amended Return and Definition of
Partner's Return for Purposes of Sec. 301.6222-1
One comment recommended that the regulations clarify that a partner
may file an amended return in order to take a position inconsistent
with the filed partnership return as long as such amended return
includes a statement identifying the inconsistent treatment. Under
section 6222(a), a partner shall, on the partner's return, treat each
partnership-related item in a manner that is consistent with the
treatment of such item on the partnership return. Proposed Sec.
301.6222-1(a) provided that the treatment of partnership-related items
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. The term ``partner's
return'' is not defined in either section 6222(a) or proposed Sec.
301.6222-1(a).
Section 6222(a) and Sec. 301.6222-1(a) are designed to ensure
consistent treatment of partnership-related items on partners' returns
and the partnership return filed with the IRS, except for cases where
the partner notifies the IRS of the inconsistency. The requirement to
be consistent with the partnership return extends to each return filed
by the partner that reflects, or is required to reflect, partnership-
related items. This includes both original and amended returns. Any
other application of this requirement would render the requirement of
consistency meaningless. For example, a partner could file a return on
April 15 taking a consistent position, only to turn around on April 16
and file an amended return taking an inconsistent position.
To clarify that the consistency requirement under section 6222(a)
and proposed Sec. 301.6222-1(a) applies to each return of the partner,
the final regulations provide that the term ``partner's return'' for
purposes of Sec. 301.6222-1 includes any return, statement, schedule,
or list, and any amendment or supplement thereto, filed by the partner
with respect to any tax imposed by the Internal Revenue Code.
Accordingly, pursuant to Sec. 301.6222-1(a), a partner on either an
original or an amended return must treat partnership-related items
consistently with how those items were treated on the partnership
return filed with the IRS.
The clarification of the term ``partner's return'' also addresses
the comment's suggestion that the regulations permit inconsistent
treatment on an amended return provided the IRS is notified of that
inconsistent treatment. Under Sec. 301.6222-1(c)(1), the requirement
that a partner treat a partnership-related item consistently with the
partnership's treatment of that item, and the effect of inconsistent
treatment, do not apply to partnership-related items identified as
inconsistent (or that may be inconsistent) in a statement attached to
the partner's return on which the partnership-related item is treated
inconsistently. As clarified in these final regulations, the term
partner's return for purposes of Sec. 301.6222-1 includes any
amendment to the partner's original return. Accordingly, so long as a
partner notifies the IRS of an inconsistent treatment, in the form and
manner prescribed by the IRS, by attaching a statement to the partner's
return--including an amended return--on which the partnership-related
item is treated inconsistently, the consistency requirement under Sec.
301.6222-1(a), and the effect of inconsistent treatment under Sec.
301.6222-1(b), do not apply to that partnership-related item.
i. Limitations on Filing Amended Returns Reporting Inconsistent
Positions
When a partner on an amended return treats a partnership-related
item inconsistently with how the item was treated on the partnership
return, the partner is making a request for an administrative
adjustment of that partnership-related item. Accordingly, the rule
under proposed Sec. 301.6227-1(a) that provided a partner may not
request an administrative adjustment of a partnership-related item was
revised to account for situations in which on an amended return a
partner treats a partnership-related item inconsistently with the
partnership return pursuant to Sec. 301.6222-1(c)(1).
Section 6227(c) provides that in no event may a partnership file an
AAR after a notice of an administrative proceeding with respect to the
taxable year is mailed under section 6231. Consistent with section
6227(c), proposed Sec. 301.6227-1(b) provided that no AAR may be filed
after a NAP has been mailed by the IRS, except as provided in Sec.
301.6231-1(f) (regarding withdrawal of a NAP). To give effect to this
rule in the context of inconsistent treatment, the final regulations
under Sec. 301.6222-1(c)(5) provide that a partner
[[Page 6475]]
may not notify the IRS that the partner is treating an item
inconsistently with the partnership return for a taxable year after a
NAP with respect to such partnership taxable year has been mailed by
the IRS under section 6231. This rule clarifies that once the IRS
initiates an administrative proceeding with respect to a partnership
taxable year, any adjustment to a partnership-related item for that
year must be determined exclusively within that partnership-level
proceeding in accordance with section 6221(a). Neither the partnership,
through filing an AAR, nor a partner, by taking an inconsistent
position, may adjust a partnership-related item outside of that
proceeding. Any actions taken by the partnership and any final decision
in the proceeding are binding on the partnership and all its partners.
Section 6223(b).
B. Inconsistent Treatment in the Case of an Administrative Adjustment
Request
Proposed Sec. 301.6222-1(c)(2) provided that the notification
procedures under Sec. 301.6222-1(c) do not apply to a partnership-
related item the treatment of which is binding on the partner because
of actions taken by the partnership, or because of any final decision
in a proceeding with respect to the partnership, under the centralized
partnership audit regime. Accordingly, under proposed Sec. 301.6222-
1(c)(2), the provisions of Sec. 301.6222-1(c) did not apply with
respect to the partner's treatment of a partnership-related item
reflected on an AAR. This meant that a partner could not treat an item
inconsistently with how such item was treated on an AAR. One comment
recommended that the regulations under Sec. 301.6222-1(c)(2) be
revised to permit a partner to notify the IRS of an inconsistent
position taken with respect to an item reported on an AAR. This comment
was adopted.
Under section 6223(b), all partners are bound by actions taken by
the partnership and by any final decision with respect to the
partnership under the centralized partnership audit regime. In the case
of an AAR, section 6223(b) binds each partner to the partnership's
making of the request itself and the mechanism by which the adjustments
requested are taken into account, including any election by the
partnership to have the partners take into account the adjustments.
Accordingly, if the partnership takes into account the adjustments by
paying an imputed underpayment, the partners must follow the rules
under section 6225. If there is no imputed underpayment or if the
partnership elects to have the partners take into account the
adjustments, the partners must follow the procedures under Sec.
301.6227-3.
When taking into account AAR adjustments under Sec. 301.6227-3,
partners must adhere to the consistency requirements under section
6222(a). See Sec. 301.6222-1(a)(4) (providing consistency requirement
applies to the treatment of a partnership-related item on an AAR).
Nothing in sections 6222, 6223(b), or 6227, however, precludes a
partner from notifying the IRS the partner is taking an adjustment into
account inconsistently with how the adjusted item was treated in an
AAR. While section 6227 imposes certain requirements with respect to
AARs, none of those requirements contradict section 6222(c)'s exception
to the consistency requirement. Accordingly, the final regulations
under Sec. 301.6222-1(c)(2) remove the language stating that the
provisions of Sec. 301.6222-1(c)(1) do not apply with respect to a
partner's treatment of a partnership-related item reflected on an AAR.
In addition, the final regulations under Sec. 301.6227-1 remove the
rule under proposed Sec. 301.6227-1(f) regarding the binding nature of
an AAR. As a result of these changes, a partner may notify the IRS it
is treating an AAR-adjusted item inconsistently in accordance with the
provisions of Sec. 301.6222-1(c).
The final regulations under Sec. 301.6222-1(c)(2) maintain the
language stating that the provisions of Sec. 301.6222-1(c)(1) do not
apply to a partner's treatment of an item reflected on a statement
under section 6226 filed by the partnership with the IRS. A cross-
reference to Sec. 301.6226-1(e) was also added. In addition, the final
regulations clarify that the provisions of Sec. 301.6222-1(c)(1) do
not apply to any item the treatment of which is binding on the partner
because of an action taken by the partnership or because of a final
decision in a proceeding under the centralized partnership audit regime
with respect to the partnership. Section 6223(b). Items reflected on a
statement under section 6226 filed with the IRS are an example of such
items.
C. Inconsistent Treatment When No Partnership Return is Filed
Proposed Sec. 301.6222-1(a)(3) provided that 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 in accordance with proposed Sec.
301.6222-1(c). One comment recommended that the regulations include an
example to illustrate the outcome of the application of the rule under
proposed Sec. 301.6222-1(a)(3). The comment observed that without a
return filed by the partnership, there would not be a return with which
to make the partner's return consistent. To illustrate the application
of Sec. 301.6222-1(a)(3), Example 7 was added under Sec. 301.6222-
1(a)(5).
In light of the comment, the final regulations under Sec.
301.6222-1(b)(1) include the clarification that where a partnership has
failed to file a return, any treatment of a partnership-related item on
a partner's return may be removed, and the IRS may determine any
underpayment of tax resulting from such adjustment.
Lastly, the final regulations eliminate the phrase ``unless the
partner files a notice of inconsistent treatment in accordance with
proposed Sec. 301.6222-1(c)'' from proposed Sec. 301.6222-1(a)(3).
This change clarifies that a partner's treatment of an item
attributable to a partnership that has not filed a return is per se
inconsistent, even if the partner notifies the IRS of the inconsistent
treatment. The notification under Sec. 301.6222-1(c) turns off the
consistency requirement, but it does not change, as a factual matter,
that the partner reported inconsistently.
D. Form and Method for Identifying Inconsistent Treatment of a
Partnership-Related Item
Under proposed Sec. 301.6222-1(c)(1), in addition to the
requirement that a statement identifying an inconsistent treatment must
be attached to the partner's return on which the item is treated
inconsistently, the statement must be provided to the IRS according to
the forms, instructions, and other guidance prescribed by the IRS. One
comment asked about the form and method for providing the IRS with the
statement described in proposed Sec. 301.6222-1(c)(1) and suggested
specific format guidance in the regulations would assist the public in
reporting an inconsistent treatment. This comment was not adopted.
The final regulations maintain the rule that a partner must provide
the statement described in Sec. 301.6222-1(c)(1) in accordance with
forms, instructions, and other guidance prescribed by the IRS.
Prescribing the form and method for notifying the IRS of inconsistent
treatment through forms, instructions, and other sub-regulatory
guidance allows the IRS the flexibility to update its procedures for
identifying an inconsistency as appropriate and necessary without the
IRS having to amend the regulations. This flexibility preserves
government resources and
[[Page 6476]]
also expedites the guidance process for taxpayers to be aware of
changes in IRS procedures. Accordingly, the final regulations do not
provide a specific form or method for identifying inconsistent
treatment.
The same comment asked whether a statement identifying inconsistent
treatment can only be filed contemporaneously with the partner's tax
return. Proposed Sec. 301.6222-1(c) provided that a statement does not
identify an inconsistency unless it is attached to the partner's return
on which the partnership-related item is treated inconsistently.
Because the plain language of proposed Sec. 301.6222-1(c) made clear
that the statement identifying inconsistent treatment must be attached
to a return, no change was made in response to this comment.
E. Proceeding To Adjust an Identified, Inconsistently Reported Item
If a partner fails to satisfy the requirements of Sec. 301.6222-
1(a), 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, unless the partner
provides notice of the inconsistent treatment in accordance with Sec.
301.6222-1(c). See Sec. 301.6222-1(b). Under proposed Sec. 301.6222-
1(c)(4)(i), if a partner notifies the IRS of an inconsistent treatment
of a partnership-related item in accordance with proposed Sec.
301.6222-1(c)(1) and the IRS disagrees with that inconsistent
treatment, the IRS may adjust the identified, inconsistently reported
item in a proceeding with respect to the partner. Nothing in proposed
Sec. 301.6222-1(c)(4)(i) precluded the IRS, however, from also
conducting a proceeding with respect to the partnership.
One comment recommended that Sec. 301.6222-1(c)(4)(i) provide that
if the IRS does conduct a proceeding with respect to the partnership to
adjust an identified, inconsistently reported item, the IRS may include
within that proceeding the partner who provided notice of inconsistent
treatment. The comment was concerned that the regulations provided
partners who identified inconsistent treatment an automatic right to
contest the IRS's adjustment through deficiency proceedings, which
would result in more partner-level proceedings and which would be
contrary to the intent of the centralized system. According to the
comment, the recommended rule would allow the IRS to avoid conducting
separate partnership and partner proceedings by allowing the IRS to
include notifying partners in the partnership-level proceeding, rather
than engaging such partners through deficiency procedures.
Proposed Sec. 301.6222-1(c)(4)(i) provided that the IRS may adjust
an identified, inconsistently reported item in a proceeding with
respect to the partner. The IRS is not required to make that
adjustment. The IRS may instead choose to make the adjustment in a
proceeding with respect to the partnership. To the extent the comment
was suggesting the IRS must adjust an identified, inconsistently
reported item in a proceeding with respect to the partner, the comment
was not correct.
If the IRS conducts a proceeding with respect to the partnership,
that proceeding will include only the IRS, the partnership, and the
partnership representative who is acting on behalf of the partnership.
No partner, except a partner that is the partnership representative, or
any other person may participate in the partnership proceeding without
permission of the IRS. See Sec. 301.6223-2(d)(1). Accordingly, while a
partner is not generally included in a proceeding with respect to the
partnership under the centralized partnership audit regime, the IRS has
the authority under Sec. 301.6223-2(d)(1) to allow any other person,
including a partner who notified the IRS of inconsistent treatment, to
participate in a partnership-level proceeding. Because that authority
exists under Sec. 301.6223-2, a separate rule within Sec. 301.6222-1
to allow notifying partners to be included in a partnership-level
proceeding is unnecessary. Therefore, the revision to proposed Sec.
301.6222-1(c)(4) as recommended by the comment was not adopted.
All partners, including partners that have filed a notice of
inconsistent treatment, are bound by the actions of the partnership and
any final decision in a proceeding with respect to the partnership
under the centralized partnership audit regime. See section 6223(b). To
clarify the application of this rule in the case of a partnership-level
proceeding to adjust an identified, inconsistently reported item,
proposed Sec. 301.6222-1(c)(4) was revised to provide that where the
IRS conducts a proceeding with respect to the partnership, and there is
no proceeding with respect to the partner regarding an identified,
inconsistently reported partnership-related item, the partner is bound
to actions by the partnership and any final decision in the partnership
proceeding.
Another comment suggested that the regulations clarify what happens
when the IRS conducts a proceeding with respect to the partnership
under Sec. 301.6222-1(c)(4)(i) and at the conclusion of that
proceeding, the IRS accepts the partnership return as filed. The
comment suggested the regulations address what procedures apply for
collection of an imputed underpayment in that scenario or for
collection of tax from the partner that filed inconsistently. This
comment was not adopted.
First, because there is no partnership adjustment in the scenario
described, there is also no imputed underpayment to collect from the
partnership. Additionally, because there is no imputed underpayment,
the partnership cannot make a push out election. See section 4.A.iii of
this preamble. With respect to collection of tax from the partner,
nothing in the regulations prevents the IRS, when it conducts a
proceeding with respect to the partnership under Sec. 301.6222-
1(c)(4)(i), from also conducting a proceeding with respect to the
partner to adjust an identified, inconsistently reported item.
Accordingly, no changes were made in response to this comment.
F. Consistent Treatment With Schedule Furnished to the Partner by the
Partnership
Under proposed Sec. 301.6222-1(d)(1), a partner is treated as
having notified the IRS of treating a partnership-related item
inconsistently if the partner 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 the partner makes
a valid election under proposed Sec. 301.6222-1(d)(2). This election
must be filed no later than 60 days after the date of such notice.
Proposed Sec. 301.6222-1(d)(2). One comment recommended that the
regulations provide that this 60-day period may be extended with
approval by the IRS. This comment was not adopted.
The IRS may assess and collect any underpayment of tax resulting
from an adjustment to conform an inconsistent position in the same
manner as if the underpayment were 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. The 60-day period under Sec. 301.6222-1(d)(2)
is designed to allow a partner to demonstrate consistency with the
information furnished to the partner by the partnership and corresponds
to the 60-day period the
[[Page 6477]]
partner would have had to request abatement if section 6213(b)(2) were
applicable. Notably, section 6213(b)(2) does not provide for any
extensions of time. Accordingly, the 60-day period under Sec.
301.6222-1(d)(2) affords the partner an opportunity to contest the
IRS's conforming adjustment the partner would not have otherwise had.
Additionally, the 60-day period is a reasonable amount of time for
the partner to demonstrate consistency with the information it has
received from the partnership. At the time the partner is notified by
the IRS of the inconsistent treatment, the partner should be in
possession of any statements, schedules, or forms furnished to the
partner by the partnership. If the partner were permitted to request
abatement, the partner would likewise only have 60 days. Furthermore,
if the partnership is made aware by the partner that an item was
treated incorrectly on the partnership return or the schedules
furnished by the partnership, the partnership has the ability to file
an AAR with respect to the partnership-related item.
Another comment suggested guidance is needed as to how the election
under proposed Sec. 301.6222-1(d)(2) is made. Proposed Sec. 301.6222-
1(d)(2)(i) provided that the election must be filed in writing with the
IRS office set forth in the notice that notified the partner of the
inconsistency. Proposed Sec. 301.6222-1(d)(2)(ii) provided the
election must be clearly identified as an election under section
6222(c)(2)(B); signed by the partner making the election; accompanied
by a copy of the incorrect statement and IRS notice that notified the
partner of the inconsistency; and include any other information
required in forms, instructions, or other guidance prescribed by the
IRS.
The comment did not suggest what further guidance should be
provided in the regulations. Deferring further guidance to forms,
instructions, and other sub-regulatory guidance allows the IRS the
flexibility to update its procedures as appropriate and necessary
without the IRS having to amend the regulations. As discussed earlier
in this section of this preamble, this flexibility preserves government
resources and also expedites the guidance process for taxpayers to be
aware of changes in IRS procedures. Accordingly, proposed Sec.
301.6222-1(d)(2) was not revised in response to this comment.
G. Effect of Inconsistent Treatment When Partner is a Partnership
Proposed Sec. 301.6222-1(a)(2) provided that the rules of Sec.
301.6222-1 apply to a partnership-partner regardless of whether the
partnership-partner has made an election under section 6221(b) to elect
out of the provisions of the centralized partnership audit regime. The
final regulations clarify that the rules of Sec. 301.6222-1 apply to
all partners including partnership-partners that have elected out of
the centralized partnership audit regime and revise the language
referring to such partners to better conform to similar references in
other regulation sections.
Proposed Sec. 301.6222-1(b)(3) provided a rule regarding the
effect of inconsistent treatment where the partner is itself a
partnership and also provided a cross-reference to the rules under
section 6232(d)(1)(B) and Sec. 301.6232-1(d). To better conform the
two sets of rules and to reduce any potential confusion between the
provisions, the final regulations eliminate the rule under Sec.
301.6222-1(b)(3) in favor of providing only a cross-reference to the
rules under section 6232(d)(1)(B) and Sec. 301.6232-1(d).
3. Determination of an Imputed Underpayment, Modification of an Imputed
Underpayment, and Adjustments That Do Not Result in an Imputed
Underpayment
Twenty comments were received concerning section 6225 and the rules
regarding imputed underpayments. This section 3 addresses the comments
concerning the determination of an imputed underpayment under proposed
Sec. 301.6225-1; modification of an imputed underpayment under
proposed Sec. 301.6225-2; and the rules regarding how adjustments that
do not result in an imputed underpayment are taken into account in
accordance with proposed Sec. 301.6225-3. As discussed in the
Background, comments concerning the rules regarding basis and tax
attributes under proposed Sec. 301.6225-4 will be addressed in future
guidance.
A. Determination of an Imputed Underpayment
Section 6225(b)(1)(B) provides that the determination of any
imputed underpayment is made by ``applying the highest rate of tax in
effect for the reviewed year under section 1 or 11.'' Consistent with
section 6225(b)(1)(B), proposed Sec. 301.6225-1 provided that an
imputed underpayment is determined by multiplying the total netted
partnership adjustment by the highest rate of federal income tax in
effect for the reviewed year under section 1 or 11 and increasing or
decreasing that product by certain adjustments to credits and
creditable expenditures.
One comment stated that the statute's use of the highest marginal
tax rate to calculate the imputed underpayment is unfair to taxpayers
who may not be taxed at the highest marginal rate, particularly with
respect to adjustments for qualified dividends or capital gains, where
a partner is subject to the alternative minimum tax, or where a partner
is a tax-exempt entity. To the extent the comment was suggesting that
the regulations use a rate different than the rate prescribed in the
statute to compute an imputed underpayment, the comment was not
adopted. Section 6225(b)(1)(B)'s mandate to ``apply the highest rate of
tax in effect for the reviewed year under section 1 or 11'' is
unambiguous, and there is no exception from application of the highest
rate for any particular partnership or for any specific type of
partner, such as an exception that takes into account unique
circumstances of specific partners. Because application of the highest
rate is established by statute, the regulations also apply the highest
rate of tax to determine an imputed underpayment under section 6225(b).
A partnership and its partners may be able to reduce the rate used
in computing an imputed underpayment by requesting modification under
section 6225(c). For example, the partnership may request modification
under Sec. 301.6225-2(d)(3) with respect to partnership adjustments
that are allocable to a tax-exempt entity or modification under Sec.
301.6225-2(d)(4) with respect to adjustments to capital gains or
qualified dividends that are attributable to an individual. The
partnership may also make a push out election under section 6226,
allowing partners to take into account the adjustments and pay tax
using their respective marginal tax rates, including taking into
account the effect of the alternative minimum tax.
Proposed Sec. 301.6225-1(a)(1) provided that each imputed
underpayment determined under Sec. 301.6225-1 is based solely on
partnership adjustments with respect to a single taxable year. One
comment recommended that the regulations allow adjustments that move
income or expense from one year to another to be netted for purposes of
computing the imputed underpayment amount. This comment was not
adopted.
The comment described an example in which the IRS determines that
the partnership should have reported income in year 1 that was
originally reported in year 2. The increase in income for year 1
results in an imputed underpayment. The decrease in income in year 2 is
an adjustment that does not
[[Page 6478]]
result in an imputed underpayment pursuant to Sec. 301.6225-
1(f)(1)(i), and the partnership and its partners take into account the
decrease in income in the adjustment year pursuant to Sec. 301.6225-3.
One partner in the comment's example reports income from other sources
in the adjustment year; the other partner does not report income from
other sources.
Section 6225(b) sets forth the rules for determining an imputed
underpayment. The statutory structure of section 6225(b) is premised on
the concept that an imputed underpayment is determined with respect to
a reviewed year and that adjustments with respect to the reviewed year
result in such imputed underpayment or are adjustments that do not
result in an imputed underpayment. Section 6225(a). Section
6225(b)(1)(A) expressly provides that ``any imputed underpayment with
respect to any reviewed year shall be determined by the Secretary by
appropriately netting all adjustments with respect to such reviewed
year . . . .'' (emphasis added). The statute does not reference
adjustments with respect to any year other than the reviewed year.
Accordingly, a rule that allows for the netting of adjustments across
tax years is not consistent with the statutory language of section
6225(b)(1)(A).
In addition, netting across multiple tax years would not constitute
``appropriately netting'' within the meaning of section 6225(b)(1)(A).
A fundamental federal income tax principle is that each taxable year
stands alone. Commissioner v. Sunnen, 333 U.S. 591 (1948) (``Income
taxes are levied on an annual basis. Each year is the origin of a new
liability and of a separate cause of action.''). A rule that provides
for netting across tax years ignores this fundamental principle. For
netting to be appropriate, it must take into account general principles
of federal income tax laws as well as the provisions of the Code.
Allowing an adjustment from one taxable year to offset or net with an
adjustment from another taxable year when determining an imputed
underpayment contravenes both the general tax principle that each year
stands alone and is not supported by the plain language of section
6225. These principles are particularly significant in the context of
partnerships given that partners' interests and the identity of
partners can vary from year to year. Because adjustments relating to
multiple years may affect items that are allocable to different
partners or in different amounts, it would be particularly
inappropriate to offset those types of adjustments against each other
when determining the imputed underpayment.
Furthermore, a timing adjustment, such as the one described in the
comment's example, often has effects that must be reflected in each
taxable year's return. Allowing such adjustments to net against each
other could inappropriately negate those effects. For instance, an
adjustment that shifts a depreciation deduction from one year to
another year might have the effect of changing a taxpayer's status from
being in a loss posture to being in a gain posture for the year from
which the loss is being shifted. Although in some cases a gain in one
year might effectively offset a loss in another year, such a result
cannot be known without an analysis of each of the partners' specific
circumstances. As discussed later in section 3.A.i. of this preamble,
requiring the IRS to review each partner's specific circumstance in
order to determine the imputed underpayment is the type of inquiry that
the centralized partnership audit regime was designed to avoid.
A rule that allows for automatic netting of adjustments across tax
years also ignores the limitation in section 6225(b)(4) and would
create significant administrative burdens for the IRS. Section
6225(b)(4) provides that if any adjustment would result in a decrease
in the amount of the imputed underpayment and could be subject to any
additional limitation under the Code if taken into account by any
person, such adjustment should not be taken into account in the netting
process described in section 6225(b)(1)(A). This provision codifies the
presumption that, except as otherwise provided, taxpayer favorable
adjustments subject to any possible limitation under the Code if taken
into account by any person are disregarded when determining an imputed
underpayment. The statute does not require the IRS to determine whether
taxpayer favorable adjustments are in fact subject to such limitations.
A rule allowing for netting across tax years would, however, require
the IRS to make such determinations. This would have the effect of
inappropriately expanding the number of tax years and partnership
adjustments potentially at issue in the partnership-level proceeding.
Not only would that result undermine the limitation under section
6225(b)(4), it would also unnecessarily complicate the partnership
examination, creating potential burdens for both the IRS and the
partnership.
A rule allowing adjustments to offset across years would also
create administrative burdens for both the IRS and for taxpayers
because it would require determining the identity of the partners
affected by the adjustment. While in some cases a lack of partner
turnover may make that determination less burdensome, in other cases
where there is a high turnover of partners or where special allocations
are involved, the determination becomes more difficult. Establishing a
rule that allows netting of adjustments across tax years as a general
matter fails to take into account the differing make-up of partnerships
and their partners. For instance, assume a case where there is a high
turnover of partners, adjustments are determined across multiple
reviewed years, and the rules allow netting of those adjustments to
form a single imputed underpayment. If the partnership requested to
modify that imputed underpayment, it would be unclear which partners
would be required to participate in modification and if the partnership
made a push out election with respect to the imputed underpayment, it
would be unclear which partners would be furnished statements under
Sec. 301.6226-2.
Lastly, as a practical matter, the IRS may not examine each
relevant partnership taxable year. If an adjustment results in moving a
partnership-related item from one taxable year to another, the IRS may
examine the other taxable year, but the IRS is not required to.
Providing a rule requiring the IRS to take into account other taxable
years when netting adjustments would effectively require the IRS to
examine all of the partnership's open taxable years, which would result
in a significant administrative burden to the IRS and the partnership
subject to the administrative proceeding. If netting across tax years
was allowed, but the IRS did not examine all relevant years, different
partnerships would receive different, and potentially distorted,
netting results. For instance, a partnership under examination for
multiple taxable years could potentially benefit from netting across
those taxable years, but a partnership under examination for only one
taxable year would not receive the same benefit. The determination of
an imputed underpayment amount for any one year should not be dependent
on the number of partnership taxable years the IRS examines.
Accordingly, a rule that allows adjustments to net across taxable
years is inconsistent with the statutory language of section
6225(b)(1)(A), contravenes general tax principles, creates
administrative burdens for the IRS, and inappropriately affects the
timing and netting of certain
[[Page 6479]]
partnership-related items. Therefore, the final regulations under Sec.
301.6225-1(a)(1) maintain the requirement that an imputed underpayment
be based solely on partnership adjustments with respect to a single
taxable year.
i. Grouping, Subgrouping, and Netting of Partnership Adjustments
Several comments provided recommendations regarding the grouping,
subgrouping, and netting rules under proposed Sec. 301.6225-1(c), (d),
and (e). In order to determine an imputed underpayment, each
partnership adjustment determined by the IRS is first placed into one
of four groupings pursuant to Sec. 301.6225-1(c) according to the type
of partnership-related item being adjusted: The reallocation grouping,
the credit grouping, the creditable expenditure grouping, or the
residual grouping. Adjustments are then subgrouped, if appropriate, and
netted to produce the total netted partnership adjustment. Proposed
Sec. 301.6225-1(b)(2), (d) and (e).
One comment stated that the grouping and netting procedures are
broad, vague, and generally err on the side of maximizing tax revenue
resulting from an audit without regard to generally applicable
provisions of the Code. The design of section 6225(a) and (b) and the
grouping and netting rules under Sec. 301.6225-1 is to create an
imputed underpayment amount that is based on the highest rate of tax
and that disregards any taxpayer favorable adjustments which would
otherwise reduce the imputed underpayment. Given this formula, an
imputed underpayment determined under Sec. 301.6225-1 will likely
reflect an amount that is larger than the cumulative amount of tax the
partners would have paid if the partners took the partnership
adjustments into account separately.
This formula is a feature of section 6225(a) and (b). The statute
expressly disregards certain adjustments that may be subject to
limitations and that would otherwise reduce the imputed underpayment
and mandates the application of the highest applicable tax rate.
Section 6225(b)(1)(B), (2) and (4). The proposed regulations followed
these statutory mandates. By removing the obligation on the IRS to
consider partners' facts and circumstances, such as whether adjustments
that would otherwise reduce the imputed underpayment might be allowed
at the partner level or whether adjustments might be taken into account
by partners at a rate lower than the highest rate, section 6225(b)
shifts the burden from the IRS during this phase of a partnership
examination. Because the imputed underpayment determined at this phase
in the examination is not required to reflect the facts and
circumstances of the ultimate partners, modifications may be necessary
to more closely reflect the proper tax treatment.
After the preliminary determination of the imputed underpayment
amount under Sec. 301.6225-1, the burden is shifted to the partnership
to utilize the modification procedures under Sec. 301.6225-2 if the
partnership so chooses. Modification is designed to allow the
partnership and its partners to arrive at an imputed underpayment
amount that is closer to the correct amount of tax while maintaining
the assessment and collection efficiencies of a centralized audit
process. See Joint Comm. on Taxation, JCS-1-16, General Explanations of
Tax Legislation Enacted in 2015, 65-66 (2016) (JCS-1-16). As an
alternative to modification and paying an imputed underpayment, the
partnership can elect under section 6226 to push out the adjustments to
its partners. Both modification and the push out election provide the
opportunity to establish that the correct amount of tax is collected
from the partnership and its partners. Accordingly, the final
regulations under Sec. 301.6225-1 were not revised in response to the
comment's concern about maximizing revenue.
With respect to the comment's concerns that the grouping and
netting procedures are broad and vague and disregard generally
applicable tax laws, to the extent those concerns related to the scope
of the centralized partnership audit regime and what determinations and
adjustments are made at the partnership level, see section 1 of this
preamble. To the extent the comment's concerns related to the fact that
the regulations do not address every possible grouping and netting
scenario, the regulations do so intentionally. The Treasury Department
and the IRS have determined it is not reasonable to identify within the
regulations all possible permutations of adjustments and partnership
facts and circumstances that might affect how an imputed underpayment
is calculated. Accordingly, the regulations provide general rules that
apply to various scenarios that could arise in the examination process.
The general nature of the grouping, subgrouping, and netting rules also
allow for the regulations to adapt to future changes to the Code.
Notwithstanding the rules' flexible nature, they are rooted in
provisions of the Code and regulations that are generally applicable to
partnerships and partners. The regulations require that adjustments be
placed into groupings and subgroupings based on how the adjusted items
are treated pursuant to the Code, the regulations, forms, instructions,
and other guidance and do not generally permit the netting of
adjustments that might otherwise be subject to limitations or
restrictions under the tax laws. Accordingly, the grouping and netting
rules are designed with regard to generally applicable provisions of
the Code. For further discussion of the comment's concerns regarding
the grouping and netting rules and the interaction with generally
applicable tax laws, see section 3.A.ii. of this preamble.
One comment suggested that the regulations should allow partners to
supply information to the partnership and require that the partnership
and the IRS apply this information in calculating the imputed
underpayment. The comment also suggested there be a procedure for
partners who are passive investors with respect to the partnership to
have an opportunity to claim passive losses for net partnership
adjustments on audits that increase income and cause the partnership to
pay tax on their behalf.
As discussed earlier in this section of this preamble, the tax
attributes of the partnership's partners generally do not factor into
the preliminary determination of the imputed underpayment. Rather, the
imputed underpayment determined under Sec. 301.6225-1 is computed
without regard to the partners' tax circumstances, for example whether
a partner would be able to offset additional partnership income with
additional deductions or whether a partner's tax attributes would
reduce the amount of tax due as a result of the adjustments. See
section 6225(b)(1)(B), (2) and (4). Modification as described under
section 6225(c) and Sec. 301.6225-2 is the more appropriate stage of
the examination for the IRS to take into account specific partner tax
attributes. Requiring the IRS to review the tax attributes of each
partner within the context of the first phase of the partnership
examination would undermine the centralized nature of the examination
process. The comment's' recommendation to allow partners to present
information during the partnership audit and require the IRS to
incorporate that information into the imputed underpayment calculation
would require the IRS to review and evaluate partner tax attributes in
a way that would significantly impede upon the exam and create numerous
[[Page 6480]]
administrative burdens for the government.
Notwithstanding these challenges, proposed Sec. 301.6225-1(c)(1)
and (d)(1) provided that the IRS may, in its discretion, place
adjustments in groupings and subgroupings in a manner different from
that described in the proposed regulations to appropriately reflect the
facts and circumstances of each examination. This rule is intended to
allow the partnership to provide information to the IRS to demonstrate
that certain partner tax attributes should be taken into account when
grouping and subgrouping to achieve a more appropriate netting of the
adjustments.
The regulations give the IRS the discretion to decide whether or
not to use this information in the initial examination phase, that is,
prior to modification. This discretion is necessary because the
partnership and the IRS may not agree as to whether the groupings and
subgroupings requested by the partnership are appropriate. Requiring
the IRS and the partnership to resolve such disagreements within the
context of the first phase of the partnership proceeding would take
time and resources away from the audit and thereby recreate the same
problems associated with introducing partner tax attributes into the
partnership level exam. If the partnership and the IRS do not agree on
the groupings and subgroupings recommended by the partnership during
the exam, the partnership is not without recourse. The partnership may
request during modification that the IRS include one or more
partnership adjustments in a particular grouping or subgrouping or
request that certain partnership adjustments be treated as if no
limitations or restrictions apply with the result those adjustments may
be subgrouped with other adjustments. See Sec. 301.6225-2(d)(6).
Accordingly, modification is generally the appropriate point in the
administrative phase at which partner tax attributes may be raised by
the partnership and considered by the IRS. For example, the partnership
and its partners can utilize the amended return procedure or the
alternative procedure to filing amended returns, which require partners
to take the adjustments into account in light of their individual tax
attributes. Those procedures would potentially allow partners to offset
passive income with any passive losses, consistent with the procedure
recommended by the comment. In the alternative, the partnership may
elect to push out the adjustments under section 6226, and the partners
would be required to take into account the adjustments and any effects
on the partners' tax attributes. At that stage, the partners could use
passive losses to the extent permitted by the rules under Sec.
301.6226-3 (regarding how partners take into account pushed out
adjustments).
Although the IRS is permitted to consider partner tax attributes
during the first phase of the partnership exam, the statute and the
regulations provide clear guidance on the modification process and
specifically how a partnership may request that partners' tax
attributes be taken into account to reduce the imputed underpayment.
Limiting the requirement that the IRS consider such information to the
modification stage is efficient for both the IRS and the partnership
because it ensures that the first phase of the exam is focused on the
substance of what adjustments must be made at the partnership level,
rather than on specific partner attributes.
For these reasons, the comment suggesting a rule that permits
partners, as a matter of right, to present information regarding their
tax attributes during the partnership audit is not adopted. However, a
partnership may request that the IRS take into account facts and
circumstances relating to its partners pursuant to the rules under
Sec. 301.6225-1(d)(1) and (e)(1), which may allow for more appropriate
grouping and subgroupings of adjustments. The comment's recommendation
that the IRS be required to apply such information during the netting
process was not adopted. The partnership may, however, request during
modification to reduce the amount of the imputed underpayment based on
the partners' specific tax attributes.
Another comment stated the proposed regulations create a divergence
between the imputed underpayment amount and the cumulative amount that
the reviewed year partners would have to pay if the adjustments were
allocated to them. The comment described two situations to illustrate
this concern. In the first situation, one adjustment increases ordinary
income, and another adjustment decreases capital gain. The comment
concludes that because the proposed regulations do not allow the
decrease in capital gain to be netted against the increase in ordinary
income, the partners may have overpaid tax with respect to the capital
gain. In the second situation, one adjustment increases capital gain,
and another adjustment decreases ordinary income. The comment concludes
that because the proposed regulations do not allow the decrease in
ordinary income to be netted against the increase in capital gain, the
partners may have overpaid tax with respect to the ordinary income. The
comment suggested that the Treasury Department and the IRS should
ensure that the government does not seek an increase in tax collections
solely because the partnership bears the burden for the tax. This
comment was not adopted because its conclusions are based on
assumptions that may not apply in all situations and section
6225(b)(1)(A) requires that adjustments are ``appropriately netted''
taking into consideration the further limitation of section 6225(b)(4)
which does not permit the netting of adjustments that would reduce the
imputed underpayment with other adjustments. The comment's suggestion
presents the same issues described earlier in this section of the
preamble regarding the introduction of partner tax information in the
partnership level proceeding.
The comment's conclusions that the partners may have overpaid tax
with respect to the decreased capital gain or the decreased ordinary
income may be true in some cases. Without a review of the partners'
accounts or some affirmation from the partners that they did pay tax,
the IRS cannot be certain this is true in all cases or any one
particular case. For example, a partner may have been in an overall
loss position for the taxable year, may not have originally reported
the decreased item, or may not have filed a return. As discussed
earlier in this section of this preamble, the initial phase of the
examination is not designed for the IRS to consider the specific
circumstances of any partners. A rule requiring the IRS to consider
specific partner circumstances would require the IRS to review each
partner's account and prior returns to ensure that the partner
previously took an item into account and paid tax on that item. Such a
rule would create significant burden on the IRS during the initial exam
phase and undermine a core aspect of the centralized partnership audit
regime's shifting of the burden from the IRS to the partnership and its
partners. As discussed earlier in this section of this preamble, a
partnership may request that tax attributes are accounted for by using
the modification procedures or the partnership may make the election
under section 6226.
The comment also appears to conclude that if all partnership
adjustments were netted, the imputed underpayment would result in some
number closer to the amount the reviewed year partners would have to
pay if the adjustments were allocated to
[[Page 6481]]
them. While this may be true in some cases, it would not occur in all
situations. For instance, assume the partner in the first situation
described by the comment had not reported and paid tax with respect to
the capital gain that was then decreased on examination. If the
regulations permitted the decreased capital gain to be fully netted
against the increased ordinary income, the result may lead to little or
no imputed underpayment, even though the partner had not paid tax on
the capital gain that was reduced. In that case, no tax was paid by the
partner on the capital gain (as originally allocated to the partner)
and no tax was paid by the partnership with respect to the increased
ordinary income, even though the partnership had additional ordinary
income that should have been allocation to the partner. While the
comment stated that the netting process under proposed Sec. 301.6225-1
eliminated situations that would benefit the taxpayer, the comment did
not acknowledge that the statutory structure of section 6225 mandates
this result. The comment also does not acknowledge that the netting
process as enacted in the statute and implemented in the regulations
also protects the IRS, for instance in cases where the partner did not
pay tax on an adjusted item. During the initial phase of determining
the imputed underpayment, the rules should not require the IRS to take
steps to ameliorate a potential discrepancy in payment amounts based on
facts applicable in one situation if the rule would result in
distortions for taxpayers with different facts.
As discussed earlier in this section of this preamble,
``appropriately netting'' within the meaning of section 6225(b)(1)(A)
means, as a general matter, that when netting partnership adjustments
for purposes of determining an imputed underpayment, all limitations
under the Code should be considered, including limitations that would
otherwise prevent the partnership from netting certain items. Section
6225(b)(4)'s rule regarding taxpayer favorable adjustments subject to
additional limitations under the Code if taken into account by any
person supports this interpretation. Because certain items could be
subject to limitations in the hands of certain partners, the statute
requires that limitations be accounted for by assuming they exist for
purposes of determining the imputed underpayment during the initial
stage of the examination. The partnership may ameliorate any
discrepancies caused by that assumption by demonstrating that no such
limitations exist either under Sec. 301.6225-1(d)(1) or (e)(1) or in
the modification phase. The partnership can also make the election
under section 6226, and the partners will account for such limitations
when taking into account the adjustments.
The comment suggested specific approaches to ameliorate the
concerns it raised. First, it suggested a rule that would allow an
ordinary income grouping to be reduced by a capital loss grouping to
the extent of $3,000 per direct or indirect individual partner. Second,
it suggested a rule that would apply the applicable rate for net
negative adjustments to the relevant subgrouping and allow this amount
to reduce the imputed underpayment amount. Neither of these specific
recommendations was adopted.
The Code permits corporate taxpayers to deduct capital losses to
the extent of capital gains. Section 1211(a). In the case of taxpayers
other than corporations, the Code allows a deduction for any capital
loss exceeding capital gain up to $3,000 ($1,500 in the case of a
married individual filing separately). Section 1211(b). A rule allowing
an offset of $3,000 against an increase in ordinary income in the
situations described by the comment would require the IRS to first
determine that the partners in the partnership are taxpayers other than
corporations such that the rules under section 1211(b) apply. While
this may be a relatively simple determination in some cases, requiring
the IRS to engage in making the determination contravenes the principle
that partners' tax attributes, including partner identity, are
generally not accounted for in the initial imputed underpayment
calculation.
To the extent the rule recommended by the comment is based on the
premise that each partner would be entitled to a $3,000 capital loss,
that premise is faulty. One, such a rule would require the IRS to know
whether there are no other capital gains (related or unrelated to the
partnership) against which the non-corporate partners would first be
required to offset the additional capital loss. Two, the rule would
require the IRS to consider whether the partner was not an individual
subject to the lower deduction amount of $1,500 allowed by section
1211(b). This process would become more burdensome as the number of
partners and tiers increased. Accordingly, this comment was not
adopted. To extent that this comment recommended a rule that allowed
more flexibility for the IRS to group adjustments according to the
facts and circumstances of the partners, that rule is reflected in
proposed Sec. 301.6225-1(d)(1) and (e)(1) as revised in the August
2018 NPRM. A partnership that wishes to request that the IRS take into
account its partner's tax circumstances, including that certain
partners are otherwise entitled to a capital loss deduction under
section 1211(b), may utilize the discretionary grouping and subgrouping
rules under Sec. 301.6225-1(d)(1) and (e)(1) or make a modification
request under Sec. 301.6225-2(d)(6).
With respect to the recommendation that the regulations apply the
applicable rate for net negative adjustments to the relevant negative
subgrouping and allow this amount to reduce the imputed underpayment
amount, this recommendation was also not adopted; however, the final
regulations allow for the result requested by the comment depending on
the facts and circumstances. The comment suggests that the rate used in
determining an imputed underpayment should be applied to negative
adjustments that would otherwise be adjustments that do not result in
an imputed underpayment and allow those negative adjustments to net
with other positive adjustments in an effort to calculate an amount
that would more closely reflect what the partners would have paid if
they had properly reported the adjusted items. Section 6225(b)(1)
provides that the imputed underpayment is determined by appropriately
netting all partnership adjustments and applying the highest rate of
tax under section 1 or 11. Section 6225(b)(3) requires that the
partnership adjustments are first 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. When ``appropriately netting'' under section 6225(b)(1)(A),
section 6225(b)(4) requires that negative adjustments that could be
subject to any limitation or restriction if taken into account by any
person be disregarded unless provided otherwise by regulation. The
regulations incorporate this rule in Sec. 301.6225-1(d)(3). The
regulations also provide the ability, however, to take facts and
circumstances into account to allow negative or downward adjustments,
where appropriate, to be subgrouped and thus netted with other
adjustments. See Sec. 301.6225-1(d)(1). For these reasons, the final
regulations maintain the process for subgrouping and netting as
provided for in the proposed regulations.
ii. Subgrouping Principles
Before being revised in the August 2018 NPRM, former proposed Sec.
301.6225-1(d) had provided that after
[[Page 6482]]
grouping the adjustments, partnership adjustments are further
subgrouped based on preferences, limitations, restrictions, and
conventions, such as source, character, holding period, or restrictions
under the Code applicable to such items. One comment stated that the
proposed grouping and subgrouping rules under former proposed Sec.
301.6225-1(d) unfairly removed many relevant distinctions between
different types of items and adjustments and netted items that do not
properly net against each other at the entity level, including
intangible drilling costs, section 1231 gains and losses, and whether a
particular partner is considered active or passive in his or her
relationship to the partnership. Another comment recommended that the
final regulations should also include a clear statement that the
netting process will be applied in accordance with generally applicable
tax law. Both comments are addressed by the amendments made by the TTCA
to section 6225(b).
Section 202(a) of the TTCA added section 6225(b)(3) to provide that
partnership adjustments 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.
Former proposed Sec. 301.6225-1(d) was revised in the August 2018
NPRM to account for the additions of sections 6225(b)(3) and (4).
Proposed Sec. 301.6225-1(d)(3)(i) provided that adjustments are
subgrouped, when appropriate, 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. By separating adjustments into
subgroupings according to how and whether the adjustments would be
separately stated pursuant to section 702(a), the rules under Sec.
301.6225-1(d)(3)(i) ensure that items that do not properly net against
each other at the partnership level under section 702(a) do not net
against each other for purposes of determining an imputed underpayment.
For example, under Sec. 301.6225-1(c) a positive adjustment to
intangible drilling costs and a negative adjustment to gain or loss
from a sale of property described in section 1231 are both placed in
the residual grouping. Pursuant to Sec. 301.6225-1(d)(3)(i), each
adjustment is then placed in a separate subgrouping to reflect that one
adjustment is a negative adjustment and that the items being adjusted
are required to be separately stated pursuant to section 702(a). See
section 702(a)(3), Sec. 1.702-1(a)(8)(i). Under Sec. 301.6225-
1(e)(1), adjustments from separate subgroupings cannot be offset
against one another. Accordingly, just as a positive amount of
intangible drilling costs would not be netted with a section 1231 loss
under section 702(a), a positive adjustment to intangible drilling
costs would not net against a negative adjustment to 1231 gain or loss
for purposes of determining an imputed underpayment.
Some items that are not separately stated pursuant to section
702(a) may nevertheless be subject to other limitations under the Code
or may not otherwise be allowed to net against ordinary income. To
account for those types of limitations, proposed Sec. 301.6225-
1(d)(3)(i) further provided that 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 its own separate
subgrouping. For example, an increase in loss attributable to a trade
or business activity of the partnership may not be deductible in the
hands of a particular partner because that partner did not materially
participate in the partnership activity. See section 469. Because the
loss may be limited in the hands of a particular partner, the increase
in loss is placed in its own separate subgrouping to prevent any
inappropriate netting against an adjustment increasing income of the
partnership.
Accordingly, both the comment expressing concerns about the netting
of items that do not properly net against each other at the entity
level and the comment suggesting the regulations apply general
principles of tax law were addressed by the changes to section 6225 in
the TTCA and the subgrouping rules under Sec. 301.6225-1(d)(3)(i) as
revised in the August 2018 NPRM. As a result, the final regulations
were not revised in response to these comments.
Generally, under Sec. 301.6225-1(d), reallocation adjustments must
be placed into their own subgroupings, but there is an exception for
when multiple reallocation adjustments apply to a single partner or
group of partners. Proposed Sec. 301.6225-1(d)(3)(ii) provided that 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 Sec. 301.6225-1(d)(3)(i) and netted in
accordance with Sec. 301.6225-1(e). Proposed Sec. 301.6225-
1(d)(3)(iv) provided a similar rule with respect to recharacterization
adjustments.
In January 2017, a prior version of the June 2017 NPRM was made
publicly available but was not published in the Federal Register. The
unpublished version of the June 2017 NPRM contained an example under
former proposed Sec. 301.6225-1(f) (former Example 3) which was not
contained in the June 2017 NPRM that was published in the Federal
Register. One comment recommended that former Example 3 be added back
to the regulations. This comment was not adopted. The Treasury
Department and the IRS considered reviving former Example 3, but
because of the changes to section 6225 in the TTCA, former Example 3
did not comport with the statute or the proposed regulations. Instead
of reviving former Example 3, a new example was added, Example 12, to
clarify subgrouping principles in the case of facts similar to, but
slightly different from, the facts in former Example 3.
One comment recommended that the regulations clarify whether and
under what conditions positive and negative adjustments resulting from
different reallocation or recharacterization adjustments are
permissibly placed in the same subgrouping. The comment stated that the
language of both proposed Sec. 301.6225-1(d)(3)(ii) and (iv) seemed to
allow the inclusion in the same subgrouping of unrelated positive and
negative adjustments provided that all of the adjustments apply to a
particular partner or group of partners. The comment suggested that the
final regulations include examples clarifying the proper grouping and
netting of adjustments pursuant to Sec. 301.6225-1(d)(3). The addition
of Example 12 under Sec. 301.6225-1(h) provides the example suggested
by the comment. As discussed earlier in this section of this preamble,
Example 12 clarifies operation of the rule under Sec. 301.6225-
1(d)(3)(ii) allowing for adjustments to be subgrouped together when the
adjustments are allocable to a particular
[[Page 6483]]
partner or group of partners. Although Example 12 illustrates these
concepts in the context of reallocation adjustments, the example's
analysis is equally applicable to recharacterization adjustments. The
result demonstrated by Example 12 under Sec. 301.6225-1(h) of the rule
under Sec. 301.6225-1(d)(3)(ii) for reallocation adjustment
subgroupings would not be the result if the negative adjustments in
that example were subject to limitations described in section
6225(b)(4) and Sec. 301.6225-1(d)(3)(i).
iii. Negative Adjustments
Under Sec. 301.6225-1(e), adjustments from each subgrouping (or
grouping if there is no subgrouping within that grouping) are netted to
produce either a net positive adjustment or a net negative adjustment
with respect to each grouping or subgrouping. When determining an
imputed underpayment, generally only net positive adjustments are taken
into account, and net negative adjustments are generally treated as
adjustments that do not result in an imputed underpayment. Adjustments
to credits and creditable expenditures are treated separately. See
section 3.A.vi. of this preamble.
One comment suggested that the requirement that only net positive
adjustments are taken into account in determining an imputed
underpayment will frequently result in double taxation of the same
income items. The comment cited to Example 4 under proposed Sec.
301.6225-1(h) (Example 3 in former proposed Sec. 301.6225-1(f)) to
demonstrate this point. In Example 4, the IRS determines that $125 of
long-term capital gain should have been reported as $125 of ordinary
income, resulting in a $125 increase in ordinary income and a
corresponding $125 decrease in long-term capital gain (a $125 increase
in long-term capital loss). The increase in ordinary income results in
an imputed underpayment, and the increase in long-term capital loss is
an adjustment that does not result in an imputed underpayment.
To the extent the comment was suggesting that the example does not
specify what happens with respect to the $125 increase in long-term
capital loss, the example was revised in the August 2018 NPRM to
clarify that this loss is taken into account in accordance with Sec.
301.6225-3. Under Sec. 301.6225-3(b), the partnership takes into
account the adjustment increasing long-term capital loss in the
adjustment year. Alternatively, the partnership may request
modification under section 6225(c) or make a push out election under
section 6226 to ensure that the negative adjustment is taken into
account by the partnership's reviewed year partners, rather than in the
adjustment year by its adjustment year partners.
To the extent the comment was expressing more general concerns
about double taxation, proposed Sec. 301.6225-1(b)(4) was added in the
August 2018 NPRM to provide that if the effect of a partnership
adjustment under chapter 1 of the Code is reflected in another
adjustment taken into account in the imputed underpayment
determination, the IRS may treat an adjustment as zero for the purposes
of calculating the imputed underpayment. This rule is designed to
ensure that when calculating an imputed underpayment, an adjustment is
not counted twice if the tax effect of that adjustment is reflected by
another adjustment made by the IRS. A partnership may request that the
IRS utilize this rule to treat an adjustment as zero if there is the
partnership is concerned about double taxation. Accordingly, to the
extent the comment was raising concerns about double taxation, no
changes were made to the regulations in response to the comment.
The final regulations under Sec. 301.6225-1(b)(4) do, however,
clarify that the IRS has the discretion to treat adjustments as zero
for purposes of determining the imputed underpayment if the effect of
the adjustment under the Code is reflected in another adjustment. The
language requiring that the adjustment must have previously been taken
into account under Sec. 301.6225-1 was removed. This change provides
the IRS the discretion to treat a partnership adjustment as zero in
more situations. For instance, the effect of an adjustment may be
reflected in an adjustment to an item treated inconsistently under
section 6222(c). The final regulations under Sec. 301.6225-1(b)(4)
also remove the language limiting the rule's application to chapter 1.
Under the final regulations, the rule applies to the effect of an
adjustment under the Code in general. This change also gives more
flexibility to the IRS to treat partnership adjustments as zero for
purposes of determining the imputed underpayment amount.
iv. Other Suggestions Regarding Grouping and Netting Adjustments
One comment suggested that its concerns with the grouping and
netting rules might be alleviated by allowing the partnership to treat
the partnership adjustment as if it arose during the adjustment year
rather than the reviewed year, which would synchronize the imposition
of the tax in the adjustment year with the adjustment year partners
bearing the liability for the imputed underpayment. This comment was
not adopted because it is contrary to the plain language of the
statute.
Section 6225(a)(1) refers to adjustments to partnership-related
items ``with respect to any reviewed year.'' Section 6225(b)(1)
provides that any imputed underpayment ``with respect to any reviewed
year'' shall be determined by appropriately netting all partnership
adjustments ``with respect to such reviewed year.'' In addition,
section 6225(d)(2) defines adjustment year to mean, in the case of an
examination, the year in which an FPA is mailed under section 6231 or
in the case of adjustment pursuant to a decision in a proceeding under
section 6234, the year in which the decision is final. Accordingly, at
the time of the modification phase of the examination, the adjustment
year will not yet be determined.
If the comment's suggestion were adopted and adjustments were
treated as having arisen in the adjustment year, it is unclear whether
the reviewed year partners' or the adjustment year partners' tax
attributes would be relevant in the modification determination. The
modification period will in every case come before the issuance of the
FPA. As a result, the adjustment year will not yet have been
determined, and therefore the adjustment year partners will not yet be
known. In addition, section 6225(c)(2) provides the ability for
partners to file amended returns in modification. The statute's use of
the phrase ``amended return'' implies that a prior return must have
been filed. A prior return could not have been filed for the adjustment
year at this point in the examination because the adjustment year would
not yet be determined. The partners from the reviewed year, therefore,
must be the partners that utilize the modification procedures under
section 6225(c)(2) through the filing of amended returns for the
reviewed year. The reviewed year partners' amended returns could not
take into account adjustment year adjustments and apply them against
reviewed year returns. Accordingly, the plain language of the statute
indicates that adjustments for purposes of determining an imputed
underpayment are the adjustments with respect to a reviewed year, not
the adjustment year.
Furthermore, section 6225(a)(1) provides the partnership shall pay
an amount equal to such imputed underpayment in the adjustment year as
provided in section 6232. In the case of adjustments that do not result
in an imputed underpayment, section
[[Page 6484]]
6225(a)(2) provides that such adjustments shall be taken into account
in the adjustment year. Section 6225(a)(2)'s explicit statement that
adjustments not resulting in an imputed underpayment are taken into
account in the adjustment year, and the absence of similar language in
section 6225(a)(1) makes clear that only those partnership adjustments
that do not result in an imputed underpayment are taken into account in
the adjustment year.
Accordingly, a reasonable reading of the statutory language of
section 6225(a) supports an interpretation that adjustments with
respect to the reviewed year should be treated as such for purposes of
determining an imputed underpayment and not treated as adjustments
arising in the adjustment year. However, Sec. 301.6225-3 does provide
that adjustments that do not result in an imputed underpayment are
taken into account in the adjustment year, that is, when the imputed
underpayment is also required to be paid. To that extent, any
adjustments that do not result in an imputed underpayment may mitigate
the burden of the imputed underpayment on adjustment year partners.
Another comment stated that the time shifting of the tax on
partnership examination adjustments from the reviewed year to the
adjustment year is inappropriate and that tax on partnership
examination adjustments should arise in the reviewed year and not in
the adjustment year. The comment further states that the burden of the
payment in all cases should fall directly on the reviewed year partners
and that the rules should require the reviewed year partners to amend
their reviewed year tax returns to include their shares of the
partnership examination adjustments. The comment was not adopted
because all of the changes recommended by the comment would require
amendments to the statute.
Section 6225 provides that if the adjustments result in an imputed
underpayment, the partnership shall pay an amount equal to such imputed
underpayment in the adjustment year as provided in section 6232.
Accordingly, the year partnerships must pay is, by statute, the
adjustment year, and if the partnership pays the imputed underpayment
without modification or does not make an election under section 6226,
the statute is designed so that the adjustment year partners bear the
burden of that payment. See section 6241(4) and Sec. 301.6241-4
(denying any deduction to the partnership for any payment made by the
partnership, including the imputed underpayment). Additionally, there
is no authority within subchapter C of chapter 63 to allow the Treasury
Department or the IRS to require that reviewed year partners file
amended returns, though partners have the option to do so in
modification. The partnership may also make the election under section
6226 which would result in adjustments relating to the imputed
underpayment for which the election was made being taken into account
by the reviewed year partners.
Another comment suggested treating an audited partnership as an
``entity'' rather than an ``aggregate'' solely for the purposes of
calculating the imputed underpayment based on majority ownership of the
partnership (measured by the partners' interest in profits).
Specifically, the comment suggested that if more than 50% of the
interest in a partnership's profit is held by one or more individuals,
S corporations, or closely-held corporations, the provisions of the
Code that apply to individuals should apply for purposes of determining
the amount of any imputed underpayment. This comment was not adopted.
As discussed earlier in this section of this preamble, section 6225
is prescriptive as to how an imputed underpayment is determined. The
determination process expressly does not determine the imputed
underpayment as if the partnership were an individual or an entity.
Instead, the process for determining the imputed underpayment,
including ``appropriately netting all partnership adjustments'' under
section 6225(b)(1)(A) in accordance with Sec. 301.6225-1 generally
does not take into account partner tax attributes, including whether a
partner is an individual or a person subject to the Code provisions
that apply to individuals. The IRS has the discretion to take into
account an attribute of a particular partner when grouping or
subgrouping the adjustments, but the IRS is not required to do so.
Sec. 301.6225-1(d)(1), (e)(1). For instance, the IRS may consider
whether a certain ownership percentage of the partnership was held by
individuals, S corporations, or closely-held corporations and group
adjustments based on information submitted by the partnership. However,
a rule requiring the IRS to treat all partnership adjustments as if
they were being taken into account by an individual as the comment
suggests is inconsistent with the statutory requirement to net items
appropriately. A rule that required the IRS to do so would also
potentially disadvantage certain partnerships depending on the nature
of adjustments and the types of the partners.
Moreover, it is not clear that the comment's suggestion of
accounting for the individual tax attributes of specific partners and
applying the Code's rules regarding those partners would yield an
appropriate netting of the adjustments for purposes of determining the
imputed underpayment at the partnership level. For example, the Code's
rules may apply differently to one individual partner versus another
individual partner. Treating all individual partners in the same manner
would negate operation of those rules. Accordingly, there is no reason
to conclude that treating adjustments according to how some but not all
partners' tax attributes would affect an adjustment is any more
reasonable than not taking into account any partners' tax attributes.
The statute provides a baseline assumption that partners' tax
attributes are not taken into account. The imputed underpayment that
best reflects the facts and circumstances of the partners should be
determined through application of the permissive grouping and
subgrouping rules under Sec. 301.6225-1(d)(1), (e)(1) or through
modification. Accordingly, the final regulations do not adopt the
comment's suggestion to base the imputed underpayment determination on
the identity of the majority of the partnership.
Section 6225(b) only provides specific rules with respect to one
type of adjustment, that is, the rule that adjustments to distributive
shares of partners not be netted under section 6225(b)(2). While it is
true a determination regarding an adjustment described in section
6225(b)(2) is usually made with some knowledge of the partners'
distributive shares, such a determination does not account for the
particular tax attributes of any specific partner. The IRS is not
required to know any other information about the specific partners at
the initial examination phase to reallocate adjustments between
partners. Therefore, in order to effectuate the rule under section
6225(b)(2), there is no need to know whether a partner is an
individual, a corporation, a pass-thru partner, or some other entity.
Section 6225(b)'s lack of reference to any particular tax attributes of
specific partners indicates that the determination of an imputed
underpayment is not dependent on knowing any partner's specific tax
attributes.
The same comment suggested another alternative in which the
grouping and netting rules would account for current year partner
attributes for purposes of determining an imputed underpayment.
[[Page 6485]]
The comment cited the amendment to section 6225(a) by TTCA that
provides if the partnership adjustments do not result in an imputed
underpayment, such adjustments shall be taken into account by the
partnership in the adjustment year. This comment was not adopted.
Section 6225 does not reference either partner tax attributes or
current year partners as a consideration in determining the imputed
underpayment. As discussed earlier in this section of this preamble,
the Treasury Department and the IRS have determined a reasonable
interpretation of section 6225(b) supports a process in which the
determination of the imputed underpayment does not depend on specific
partners' tax attributes. Moreover, the comment's reference to
``current year'' is ambiguous; it could refer to any number of
different time periods: the adjustment year, the actual calendar year
in which the imputed underpayment is being determined, the year the
imputed underpayment is proposed in a notice of proposed partnership
adjustment, the time during the modification period prior to issuance
of the FPA, or, if the partnership contests the partnership adjustments
in court, the year the court decision is final. It is not administrable
for the IRS to determine an imputed underpayment based on the potential
tax attributes from time periods that are not fixed relative to the
reviewed year and that may result in different partners being the
relevant partners. The final regulations reflect the amendments to
section 6225 by the TTCA, and therefore the final regulations were not
revised in response to this comment.
v. Recharacterization Adjustments
One comment recommended that the grouping and subgrouping rules be
reconsidered due to the concern that under the proposed regulations,
the inability to net certain overpayments and underpayments could lead
to taxpayers not receiving an appropriate adjustment for taxes
previously paid. The comment cited to Example 4 under proposed Sec.
301.6225-1(h) to highlight this concern. In Example 4, the IRS
determines that $125 of long-term capital gain should have been
reported as $125 of ordinary income, resulting in a $125 increase in
ordinary income and a corresponding $125 decrease in long-term capital
gain (effectively, a $125 increase in long-term capital loss). The
increase in ordinary income results in an imputed underpayment, and the
increase in long-term capital loss is an adjustment that does not
result in an imputed underpayment.
The comment noted that the example does not specify what happens
with respect to the $125 increase in long-term capital loss. As
discussed earlier in section 3.A.iii. of this preamble, the example has
been revised to clarify that $125 increase in long-term capital loss is
taken into account in the adjustment year in accordance with Sec.
301.6225-3. The comment also noted that it is unknown whether the
partnership will be able to use the increased capital loss in the
future. To avoid this potential adverse consequence, the comment
recommended that the regulations permit a partnership to net
adjustments across different categories of gain or loss to reflect
taxes that were previously paid. This comment was not adopted for
several reasons.
As an initial matter, implicit in the comment's suggestion is that
either the IRS or the partnership have knowledge of taxes previously
paid by the partners. As discussed earlier in section 3.A.i. of the
preamble, facts and circumstances unique to specific partners are
generally not taken into account in determining whether the adjustments
result in an imputed underpayment. The regulations give the IRS wide
latitude to consider such facts and circumstances, but the rules do not
narrowly define the circumstances when that occurs. See Sec. 301.6225-
1(d)(1) and (e)(1). The regulations are designed to maintain
flexibility for both the IRS and the partnership to allow for the
particular examination to accommodate the unique circumstances of each
examination. Based on these reasons alone, the comment's suggestion was
not adopted.
The comment's suggestion was also not adopted because it is
inconsistent with the overall approach applied to how
recharacterization adjustments are taken into account in determining an
imputed underpayment. Proposed Sec. 301.6225-1(c)(6)(iii) provided
that a recharacterization adjustment results in at least two separate
adjustments: One adjustment reversing the improper characterization of
the partnership-related item, and the other adjustment effectuating the
proper characterization of the partnership-related item. Generally, one
of those adjustments is a positive adjustment and the other is a
negative adjustment, but each adjustment is normally the same numerical
amount ($125 in the case of Example 4 under proposed Sec. 301.6225-
1(h)). Under proposed Sec. 301.6225-1(d)(3)(iv), the positive
adjustment and the negative adjustment are each placed into its own
separate subgrouping. Because an adjustment in one subgrouping may not
be netted against an adjustment from another subgrouping, the positive
adjustment is not offset by the negative adjustment, and the result is
a net positive adjustment that forms the base for an imputed
underpayment amount. Proposed Sec. 301.6225-1(e)(2) and (3)(i).
These rules are adopted largely without change in the final
regulations in order to ensure that recharacterization adjustments are
not inappropriately netted when determining an imputed underpayment, as
required by section 6225(b)(1)(A). Allowing for the netting of the
negative adjustment against the positive adjustment in the case of a
recharacterization adjustment, as suggested by the comment, could cause
the positive adjustment to be negated in its entirety, which would
defeat the purpose of making the adjustment in the first place. It
would also result in the recharacterization adjustment not properly
being reflected in the imputed underpayment calculation. For instance,
allowing the capital loss to fully offset the ordinary income in
Example 3 under Sec. 301.6225-1(h) would not adequately reflect the
fact that there was an underreporting of ordinary income by the
partnership for that taxable year. Furthermore, if there were no
imputed underpayment because recharacterization adjustments were
allowed to net, there would be no statutory basis for imposing an
interest charge on the partnership as suggested by the comment.
Accordingly, the comment's suggestion to net adjustments across
different categories of gain or loss to reflect taxes that were
previously paid was not adopted, though the effect of such adjustments
may be mitigated, in whole or in part, under certain circumstances
through the modification procedures or by making a push out election
under section 6226. The final regulations under Sec. 301.6225-1(e)(2)
do clarify, however, that positive adjustments and negative adjustments
within the same subgrouping may only net within that same subgrouping.
No netting is permitted across subgroupings.
vi. Credits and Creditable Expenditures
In determining whether partnership adjustments result in an imputed
underpayment, adjustments to credits are placed in the credit grouping
described under Sec. 301.6225-1(c)(3). One comment suggested that for
administrative efficiency, it would make sense to group and order
credits in accordance with Form 3800 and recommended that the
regulations provide for grouping and ordering
[[Page 6486]]
credits in such a manner. This comment was not adopted.
As discussed earlier in section 3.A.ii. of this preamble, the
subgrouping rules under Sec. 301.6225-1(d)(3)(i), including the
application of those rules to the credit grouping, take into account
any limitations or restrictions under the Code. Therefore, to the
degree the Code would require certain credits to be subgrouped within
the credit grouping to reflect any limitations or restrictions, the
rules under Sec. 301.6225-1(d)(3)(i) allow for that result. In
addition, when determining subgroupings the IRS may take into account
the facts and circumstances of a partnership and its partners. It may
be the case that the subgroupings with respect to a particular set of
adjustments ultimately reflects the manner in which credits are grouped
and ordered on Form 3800, but that may not always be the case. The
regulations provide the necessary flexibility to achieve the result
suggested by the comment without binding the IRS and partnerships to a
particular manner in which credits must be subgrouped.
Additionally, because the Form 3800 and the underlying statutory
rules it reflects may change over time, it is unwise to link the
regulatory rules for subgrouping with the form's methodology for
grouping credits. Relying on the general subgrouping rules under Sec.
301.6225-1(d)(3)(i) gives the IRS and partnerships the flexibility to
adapt to changes in the Code and any form changes without needing to
amend the regulations.
Adjustments to creditable expenditures are placed in the creditable
expenditure grouping described under Sec. 301.6225-1(c)(4). Proposed
Sec. 301.6225-1(c)(4)(B), (d)(3)(iii), and (e)(3)(iii) provided
specific rules relating to foreign creditable tax expenditures. Aside
from the general rule regarding what constitutes a creditable
expenditure, no additional rules relating to creditable expenditures
were proposed.
The Treasury Department and the IRS requested comments on the
appropriate treatment of creditable expenditures. One comment suggested
any items that may be treated as a credit when taken into account by a
partner and not otherwise limited (for instance, by their non-
creditable status against the alternative minimum tax) be credited
against the imputed underpayment amount. For other items which may be
subject to limitations at the individual level, the comment suggested
that the regulations provide rules similar to those rules proposed
under proposed Sec. 301.6225-3, regarding adjustments that do not
result in an imputed underpayment, because any adjustment to a credit
would not result in an imputed underpayment.
With the exception of the rules under Sec. 301.6225-1 regarding
foreign tax creditable expenditures, the Treasury Department and the
IRS have determined not to issue regulations regarding the treatment of
creditable expenditures at this time. However, the final regulations do
clarify that the general subgrouping principles under Sec. 301.6225-
1(d)(3)(i) apply when subgrouping adjustments to creditable
expenditures. The comments received with respect to creditable
expenditures remain under consideration, and future guidance will be
issued when appropriate. The final regulations also clarify that a net
positive adjustment to creditable foreign tax expenditures is excluded
from the calculation of the total netted partnership adjustment under
Sec. 301.6225-1(b)(2).
Comments were also requested regarding how credit recapture
situations should work under the centralized partnership audit regime.
One comment offered suggestions with respect to two credit recapture
situations. The first situation involved a credit recapture that
results from a partnership adjustment. The comment recommended in that
situation that the regulations should incorporate any credit recapture
into the calculation of any imputed underpayment to the extent that the
originating credits were generated from partnership activities, but
that this incorporation should be limited to partnerships with partners
that actually would have benefited from the original credits. This
recommendation was partially adopted.
A recapture of a credit generated by partnership activities
constitutes a partnership adjustment as defined under Sec. 301.6241-
1(a)(6), and the credit recapture would constitute a positive
adjustment under Sec. 301.6225-1(d)(2)(iii)(A) and be placed in the
credit grouping under Sec. 301.6225-1(c)(3). The full amount of the
credit recapture would be taken into account in the determination of
the imputed underpayment, unless the partnership requests, subject to
IRS approval, that the credit recapture should be taken into account
differently during the partnership-level proceeding or pursuant to a
modification request. See Sec. 301.6225-1(d)(1), (e)(1), Sec.
301.6225-2. This rule is necessary because, as discussed earlier in
this section of this preamble, in general, the initial determination of
an imputed underpayment does not account for the attributes of the
partnership's partners, including whether and to what extent any
partners actually benefited from the original credits. Accordingly, the
final regulations include a credit recapture amount in the amount of
the imputed underpayment, and this amount is not limited to the amount
partners actually benefited from the recaptured credits unless the
partnership can affirmatively demonstrate to the satisfaction of the
IRS during exam either before issuance of the NOPPA or on modification
the appropriate partner-level tax treatment.
The second situation described by the comment involves a
partnership adjustment that results in a credit that is incorporated
into the imputed underpayment calculation, presumably as a reduction to
the imputed underpayment and that may later be subject to recapture.
The comment recommended that the regulations require the partnership to
notify partners that they received the benefit of such credits and that
the partners may be obligated to recapture those credits at a later
date. The comment suggested this notice could be provided as notes to
the adjustment year Schedule K-1. This comment was not adopted. The
final regulations do not require that the partnership notify the
partners of any risk of future credit recapture, though the partnership
is not prohibited from doing so if the partnership determines that such
notification would be beneficial to the partners and the partnership.
Except where required for the operation of the provisions of the
centralized partnership audit regime, the Treasury Department and the
IRS do not generally regulate communications between the partnership
and the partners, and therefore the final regulations do not impose a
requirement for notification by the partnership concerning possible
credit recaptures.
Because a net negative adjustment to a credit, that is, an increase
in an item of credit, would generally be subject to limitations under
the Code, the final regulations under Sec. 301.6225-1(e)(3)(ii)
clarify that a net negative adjustment to a credit is treated as an
adjustment that does not result in an imputed underpayment as described
in Sec. 301.6225-1(f)(1), unless the IRS determines otherwise. This
rule ensures that the total netted partnership adjustment is not
inappropriately reduced by an increase in credit that would subject to
limitations in the hands of the partners of the partnership.
B. Modification of an Imputed Underpayment
Proposed Sec. 301.6225-2 provided the rules and procedures
regarding modification of an imputed
[[Page 6487]]
underpayment by the partnership. The Treasury Department and the IRS
received multiple comments regarding proposed Sec. 301.6225-2 focusing
on the following areas: (1) Modification in general; (2) timing of
modification requests and determinations; (3) amended return
modification; (4) the alternative procedure to filing amended returns;
(5) rate modification; (6) modification pertaining to certain passive
losses of publicly traded partnerships; (7) modification pertaining to
qualified investment entities; (8) closing agreement modification; and
(9) recommendations to add additional types of modifications.
i. Comments Pertaining to Modification in General
The modification provisions under Sec. 301.6225-2 are designed to
determine an imputed underpayment amount that reflects, as closely as
possible, the tax the partners would have paid had they correctly
reported the adjusted items, while at the same time maintaining the
efficiencies of a streamlined examination and collection process. See
JCS-1-16 at 65-66. One comment suggested, that the modification
provisions do not operate as intended because those provisions do not
expressly permit a modification to reflect how the partners actually
took an item into account, to account for reductions that would be
permitted to offset an increase under generally applicable law, or to
otherwise expressly challenge the IRS's method of calculating a
proposed adjustment amount. Except as described later in this section,
no changes to the regulations were made in response to this comment.
The Treasury Department and the IRS do not agree with the comment's
characterization of how the modification provisions operate because the
modifications available under Sec. 301.6225-2 permit a partnership to
achieve the results sought by the comment. For instance, both the
amended return procedure and the alternative procedure to filing
amended returns provide an opportunity for the partnership to request
modification to reflect how an item was actually taken into account by
its partners and to account for offsetting reductions permitted under
generally applicable law. When a partner files an amended return
including his share of the partnership adjustments, the amended return
reflects a tax amount based on how the partner originally reported the
partnership-related item prior to adjustment compared to how the
partnership adjustment affects the partner's original return. This tax
amount is the correct amount of tax for that partner after taking into
account the partnership adjustment and includes any allowable
reductions that may offset any additional income determined at the
partnership level.
Regarding the comment's concern that a partnership does not have an
opportunity to challenge the IRS's method of calculating a proposed
adjustment amount, proposed Sec. 301.6225-2(d)(6) provided a procedure
for modifying the composition of an imputed underpayment. Under Sec.
301.6225-2(d)(6), a partnership may request that the IRS include one or
more partnership adjustments in a particular grouping or subgrouping.
If certain negative partnership adjustments should be treated as if no
limitations or restrictions in fact apply to the partners to whom the
adjustments are allocated and the partnership can establish this
result, if approved, on modification, such negative adjustments may be
properly grouped or subgrouped with other adjustments and therefore
allowed to net against those adjustments in accordance with Sec.
301.6225-1(e) to reduce the amount of the imputed underpayment.
To the extent the comment was suggesting that the modification
procedures do not provide the partnership an opportunity to challenge
the substance of partnership adjustments, the comment is correct but no
change is made in response to the comment. The statutory modification
procedures are designed to allow the partnership to modify the amount
of the imputed underpayment, not adjust the substance of the
partnership adjustments that underlie the imputed underpayment. The
substance of partnership adjustments are determined by the IRS on
examination, and may be further revised in the IRS Appeals Office (IRS
Appeals) or by a court in a proceeding for readjustment brought under
section 6234. Although the comment did not explicitly state it as such,
to the extent the comment was recommending a rule under Sec. 301.6225-
2 that allows a modification to reflect a circumstance where a partner
actually took an item into account in a manner consistent with how that
item was adjusted by the IRS during the partnership proceeding, this
suggestion was adopted. As discussed later in section 3.B.ix. of this
preamble, the final regulations under Sec. 301.6225-2(d)(2)(ii) allow
a partnership to request modification based on how adjusted items were
taken into account by a partner prior to the item being adjusted by the
IRS.
The same comment also suggested that the modification procedures
permit a partnership to demonstrate how an adjustment would impact its
partners and reduce an imputed underpayment without a need for the
partners to file an amended return. The other proposed modification
procedures provided multiple opportunities for partnerships to
demonstrate the impact of adjustments on specific partners. The
alternative procedure to filing amended returns is one way in which
this type of modification may be achieved. Under Sec. 301.6225-
2(d)(2)(x), a partnership may submit on behalf of a partner, in
accordance with forms, instructions, and other guidance prescribed 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 partner were filing an amended return. If the
partnership avails itself of this procedure with respect to a partner,
the partner does not need to also file an amended return in order for
modification to be approved. The amended return procedures and the
alternative procedure to filing amended returns are discussed further
in sections 3.B.iii. and 3.B.iv. of this preamble.
Other modification procedures also provide the partnership with an
opportunity to demonstrate the effect of adjustments on specific
partners. For instance, tax-exempt modification provides an opportunity
for the partnership to demonstrate that partnership adjustments are
allocable to a partner that would not owe tax by reason of its status
as a tax-exempt entity. Rate modification allows partnerships to
demonstrate that partners would be subject to a lower rate than the
highest rate of tax applied to calculate the imputed underpayment.
Because the partnership has many avenues within modification to
demonstrate the effect a partnership adjustment would have on specific
partners, no new modification procedures were adopted in response to
this comment.
Former proposed Sec. 301.6225-2 permitted a partnership to request
modification with respect to an indirect partner (as defined in Sec.
301.6241-1(a)(4)). See, for example, former proposed Sec. 301.6225-
2(d)(2). One comment suggested that permitting partnerships to modify
their imputed underpayment to account for direct and indirect partners
is consistent with the objective of determining an imputed underpayment
amount that is as close as possible to the tax due if the partnership
and partners had correctly reported and paid. The comment further
suggested
[[Page 6488]]
that permitting modifications for direct and indirect partners would
also reduce the disincentives for partnerships to pay the imputed
underpayment and recommended the final regulations adopt rules
permitting modification with respect to indirect partners, consistent
with the proposed regulations.
The final regulations are consistent with the comment's request and
adopt the proposed rules allowing modification with respect to indirect
partners, provided the indirect partner is a relevant partner as
defined in Sec. 301.6225-2(a). The August 2018 NPRM introduced, the
term ``relevant partner'' to describe any person for whom modification
is requested by the partnership that is a reviewed year partner,
including a pass-through partner, or an indirect partner. The term
relevant partner does not include, however, any person that is a
wholly-owned entity disregarded as separate from its owner for Federal
income tax purposes. No comments were received regarding the definition
of relevant partner. The final regulations maintain the definition of
relevant partner from proposed Sec. 301.6225-2(a).
Accordingly, under the final regulations a partnership may request
modification with respect to reviewed year partners (direct partners),
including pass-through partners, and indirect partners. A partnership
may not request modification, however, with respect to a direct or
indirect partner that is a wholly-owned entity disregarded as separate
from its owner for Federal income tax purposes.
One comment noted some concerns regarding the interaction between
the centralized partnership audit regime and ERISA. The comment
expressed concerns about situations in which the partnership
representative must decide whether to request a modification that
benefits non-ERISA partners over ERISA partners and how that affects
the discharge of any fiduciary duties under ERISA. To address these
concerns, the comment made three recommendations. First, the comment
recommended that the regulations provide that the partnership
representative may solicit a vote of the partners in the partnership in
determining whether to request a modification. This recommendation was
not adopted.
The decision whether to solicit a vote of the partners in the
partnership as part of determining whether to request modification or a
particular type of modification is fully within the authority of the
partnership representative. Nothing in the final regulations prevents
or requires the solicitation of a vote by the partnership
representative. Additionally, if the partnership and its partners
impose such a condition on the partnership representative through an
agreement with the partnership representative, any failure to adhere to
that agreement does not affect actions taken by the partnership
representative. See Sec. 301.6223-2(d).
Second, the comment recommended that the IRS agree to automatically
grant a request for an extension of the 270-day period for requesting
modification if a vote of the partners whether to request modification
has been solicited. This comment was not adopted for the reasons
discussed in section 3.B.ii. of this preamble.
Lastly, the comment recommended that the Treasury Department and
the IRS share a suggestion with the Department of Labor that the
Department of Labor clarify that a partnership representative will not
be treated as a fiduciary with respect to any ERISA plan partner if the
partnership representative requests or fails to request a modification
based on the results of a vote of the partners. The rules regarding who
is treated as a fiduciary with respect to any ERISA plan are beyond the
scope of these regulations. However, as requested, the comment has been
forwarded to the Department of Labor.
Another comment recommended that the IRS revise proposed Sec.
301.6225-2(c)(2)(ii) to limit the required information submitted with
any modification request to that specific information relevant to the
type of modification requested. The comment noted that requiring
extensive and detailed documentation for each modification request will
limit the ability of some partnerships to take advantage of the
modification procedure. The comment also urged the IRS to establish
realistic minimal documentation requirements for any modification
request and create additional specific relevant requirements for the
various types of modification requests permitted under the proposed
regulations. The comment further noted that the ability of the IRS to
request supplemental information prior to approval (as provided in
proposed Sec. 301.6225-2(c)(4)) will ensure that the IRS obtains
documentation they deem necessary for a particular set of facts and
circumstances. This comment was adopted.
The final regulations under Sec. 301.6225-2(c)(2)(ii) clarify that
the partnership representative must furnish to the IRS information as
required by forms, instructions, or other guidance prescribed by the
IRS or as is otherwise requested by the IRS. The final regulations
provide examples of such information, including the information that
was described previously in proposed Sec. 301.6225-2(c)(ii). The
information listed in the proposed regulations pertained to items that
are necessary to process the majority of modification requests. It is
possible, however, that certain items may not be necessary in every
case, and if such items are not necessary, or if different items are
more appropriate, the IRS will describe the information required in
forms, instructions, or other guidance. In this way, the regulations
provide the flexibility for the IRS to request what is needed for
efficient and effective processing of modification requests, while
maintaining the flexibility to adapt information requests in the
future.
The final regulations under Sec. 301.6225-2(c)(2)(i) also clarify
that, pursuant to section 6241(10), the partnership may be required to
submit or file items required to be provided to the IRS under Sec.
301.6225-2 in an electronic format. The form and manner for submission
of anything required to be submitted under Sec. 301.6225-2 will be
described in forms, instructions, and other guidance prescribed by the
IRS. Lastly, the final regulations under Sec. 301.6225-2(c)(2)(i)
clarify that the IRS will deny modification not only for the failure to
substantiate a modification request but also for the failure to pay
anything required under Sec. 301.6225-2.
ii. Timing of Modification
Proposed Sec. 301.6225-2(c)(3) provided rules regarding the time
for submitting modification information to the IRS. One comment made
three recommendations regarding these rules. First, the comment
suggested that the final regulations provide a specified time frame in
which the IRS must respond to a request for modification. This
suggestion was not adopted because the regulations under section 6235
provide a time frame within which the IRS will respond to a
partnership's modification request.
Pursuant to Sec. 301.6235-1(a)(2) and (b), in the case of any
modification of an imputed underpayment, no partnership adjustment may
be made later than the date that is 270 days after the date on which
everything required to be submitted under Sec. 301.6225-2 for
modification is so submitted. The date on which everything required to
be submitted is so submitted is the date the modification period ends
or expires. Sec. 301.6235-1(b)(2). Accordingly, in the case of a
modification request, the IRS
[[Page 6489]]
must generally mail an FPA to make a partnership adjustment within 270
days of the date the modification period ends.
To the extent the comment was requesting a deadline by which the
IRS must respond to a request for modification prior to the time limit
for making adjustments under section 6235, the comment was not adopted.
It is not administrable for the IRS to impose a deadline that would
apply in every case that is earlier than the statutory deadline imposed
by section 6235. The facts and circumstances of each administrative
proceeding, the partnership adjustments made during that proceeding,
and the modifications that are requested may differ greatly. Similarly,
the complexity of the modification process may range from simple and
straight forward to highly complex. Finally, for those modification
requests that are more complex or that require additional
documentation, the partnership may extend the time period for
submitting modifications under Sec. 301.6225-2(c)(3) to allow for
additional time and any additional documentation. For the reasons
discussed in section 3.B.iii. of this preamble, the IRS plans to adopt
procedures under which the IRS will respond to a request for
modification in the FPA, including the planned time frame for
responses. It is important to tax administration that these procedures
are developed in separate guidance to allow for additional flexibility
as the IRS gains more experience with the centralized partnership audit
regime and the modification process. The 270-day period for mailing an
FPA therefore acts as the outside time frame within which the IRS must
respond to a request for modification. Because this time frame exists
elsewhere in the regulations, the final regulations under Sec.
301.6225-2 do not provide a separate time frame for providing a
response to a modification request.
The comment also recommended that the final regulations provide
that if there is a pending request for modification at the expiration
of the 270-day period, the IRS will automatically agree to an extension
of that period until at least 30 days after they provide their
response. It is not clear from the face of the comment which 270-day
period the comment was referring to--the 270-day period under Sec.
301.6225-2(c)(3)(i) in which everything required for modification must
be submitted or the 270-day period under Sec. 301.6235-1(b) in which
the IRS must mail an FPA to make a partnership adjustment. Both periods
may be extended at the request of the partnership or the IRS. See
Sec. Sec. 301.6225-2(c)(3)(ii); 301.6235-1(d).
Regardless of which 270-day period the comment was referring to,
the comment was not adopted. The final regulations do not provide that
the IRS will automatically agree to an extension of either period under
any circumstance. Whether an extension of the time to submit
modification information, or an extension of the time to consider such
information, is warranted is based on the facts and circumstances. In
some cases an extension may be appropriate, for example, where there is
a pending request and additional information would help clarify the
issues. In other cases an extension may not be appropriate, for
example, where it is clear that more information is likely to be of
little to no value. Accordingly, while the regulations allow for an
extension of both the period to submit modification information and the
period in which the IRS has to consider such information, neither
extension is automatic but rather must be based on the facts and
circumstances of the particular case.
Lastly, the comment suggested the regulations provide a time frame
for a partnership to respond to an IRS request for additional
information during the IRS's review of a modification request. The
comment recommended the time frame for responding be a minimum of 60
days and suggested that this issue is particularly significant if the
request occurs near the expiration of the 270-day period. This comment
was not adopted, but the IRS plans to adopt procedures that will allow
a partnership time to provide additional information, when necessary,
with respect to a particular request for modification. Because not all
modification requests will require additional information from the
partnership, this time frame is not provided for in the regulations. In
addition, the response time may depend on the facts and circumstances.
For example, as the comment notes, if a request for additional
information occurs near the end of the 270-day period to submit
information, there might not enough time to allow for a 60-day response
period. While it is true the partnership and the IRS may agree to
extend the 270-day period, this will not always be the case.
Accordingly, a rule establishing a 60-day time frame for responding to
requests for additional information in every case is not appropriate
and would, in the example noted in the comment, serve as an automatic
extension of the 270-day period to submit information that might not be
requested by the partnership or consented to by the IRS. Nevertheless,
if more information is required from the partnership, the IRS
appreciates the need for partnerships to know when that information is
due. The IRS plans to establish appropriate procedures through forms,
instructions, or other guidance. As a result, the regulations were not
revised in response to this comment.
iii. Amended Returns
Proposed Sec. 301.6225-2(d)(2) provided rules regarding
modification with respect to amended returns filed by partners.
Proposed Sec. 301.6225-2(d)(2)(i) provided that a partnership may
request modification of an imputed underpayment based on an amended
return filed by a relevant partner provided all of the partnership
adjustments properly allocable to such relevant partner are taken into
account. One comment recommended that the regulations clarify whether
modification will be allowed if a partner files an amended return
taking into account adjustments that make up one imputed underpayment,
while not taking into account adjustments that make up a separate
imputed underpayment which also affects that partner. This comment was
not adopted because its recommendation contradicts the statute.
The requirement in proposed Sec. 301.6225-2(d)(2)(i) that partners
take into account all partnership adjustments derives from section
6225(c)(2)(A)(ii). Section 6225(c)(2)(A)(ii) states that when partners
file amended returns in modification, that return must ``take into
account all adjustments'' under section 6225(a) that are ``properly
allocable to such partners (and the effect of such adjustments on any
tax attributes).'' Section 6225(a) refers to ``any adjustment by the
Secretary to any partnership-related items with respect to any reviewed
year of a partnership . . .'' Section 6225(c)(2)(A)(ii)'s reference to
``all adjustments'' under section 6225(a) does not distinguish between
partnership adjustments that result in an imputed underpayment and
partnership adjustments that do not result in an imputed underpayment.
By not distinguishing between the types of partnership adjustments, the
language of section 6225(c)(2)(A)(ii) indicates that all partnership
adjustments must be taken into account by partners filing modification
amended returns, as opposed to only those adjustments that are
associated with the imputed underpayment for which modification is
requested. Consistent with section 6225(c)(2)(A)(ii), the final
regulations under Sec. 301.6225-2(d)(2)(i) require that even in the
case of multiple imputed
[[Page 6490]]
underpayments, partners filing modification amended returns must take
into account all partnership adjustments, not just the adjustments
associated the imputed underpayment for which modification is
requested.
The comment also asked whether there are any specific requirements
or limitations that apply in the case of an amended return modification
request made with respect to one imputed underpayment, but not with
respect to a separate imputed underpayment. Nothing in the regulations
imposes specific requirements or limitations on the partnership or its
partners when utilizing amended return modification with respect to
only one imputed underpayment. The partnership and its partners must
comply with all the requirements under Sec. 301.6225-2(d)(2) with
respect to any request for amended return modification, including a
request made for only one imputed underpayment in the case of multiple
imputed underpayments.
Proposed Sec. 301.6225-2(d)(2)(ii)(A) provided that an amended
return modification request will not be approved unless the 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 at the time such return is filed with the IRS.
One comment suggested that the full payment requirement under Sec.
301.6225-2(d)(2)(ii)(A) should be satisfied if the partner is in
compliance with available IRS administrative processes to make full
payment, for example, an installment payment agreement. Another comment
recommended that the regulations permit partners to submit requests for
installment agreements or offers in compromise within the 270-day
modification period. These comments were not adopted.
Section 6225(c)(2)(A)(iii) provides that if one or more partners
file amended returns during modification, such returns take into
account the adjustments properly allocable to such partners, and
``payment of any tax due is included with such returns,'' the imputed
underpayment is determined without regard to the adjustments so taken
into account. Payment of any tax due is a statutory requirement under
section 6225(c)(2)(A)(iii). Consistent with section 6225(c)(2)(A)(iii),
proposed Sec. 301.6225-2(d)(2)(ii)(A) required full payment of any
tax, penalties, and interest due at the time the amended return is
filed with the IRS. If payment is not included with the amended return,
the IRS will not approve modification with respect to the amended
return.
This rule is necessary to ensure that the IRS collects the entire
amount of tax that results from the partner's share of partnership
adjustments before approving the partnership's request that the imputed
underpayment be calculated without regard to those adjustments.
Allowing a partner to enter into an installment agreement undermines
the ability of the IRS to collect tax on those adjustments both from
the partnership, because the adjustments would no longer be reflected
in the imputed underpayment, and from the partner that may ultimately
default on the installment agreement. If a partner ultimately does not
pay, the IRS may not be able to collect against that partner and likely
would be outside the time period within which it must make partnership
adjustments, preventing the IRS from collecting any additional imputed
underpayment from the partnership. Similar concerns are presented by
allowing a partner to enter into an offer in compromise. Moreover, a
rule permitting partners to request installment agreements and offers
in compromise as alternatives to full payment would increase the
administrative burden on the IRS by requiring the IRS to evaluate
whether such requests were appropriate, slowing down the modification
process in general, and complicating the amended return process
specifically. Accordingly, the final regulations retain the rule that
full payment of any tax, penalties, and interest due as a result of
taking into account the partner's allocable share of adjustments is
required in order for modification to be approved with respect to a
partner's amended return. In addition, the final regulations under
Sec. 301.6225-2(c)(2)(i) clarify that a failure by any person to make
any payments required with respect to a modification request within the
time restrictions described in Sec. 301.6225-2(c) will result in a
denial of a modification request.
Proposed Sec. 301.6225-2(c)(3) provided that all information
required under Sec. 301.6225-2 with respect to a request for
modification must be submitted on or before 270 days after the date the
NOPPA is mailed, unless that period is extended with the permission of
the IRS. Several comments recommended partners only be required to file
amended returns or make payments on those returns after the issuance of
the FPA to allow the court to review the partnership adjustments before
modification is requested. One comment recommended that, to provide an
adequate amount of time, partners should be allowed at least 270 days
from the time of the receipt of an FPA to file amended returns. The
comment further recommended that the 270-day period be tolled at any
time during which a court proceeding pursuant to section 6234 is
ongoing. Another comment recommended that the final regulations commit
the IRS to freely grant extensions of the 270-day period and other
relevant periods and allow taxpayers to seek modification of the
underpayment by filing an amended return, or use the alternative
procedure to filing amended returns, within 60 days after there has
been a final determination in the partnership case. These comments were
not adopted.
First, allowing modification requests, including amended returns,
after the FPA is mailed or after there is a court decision with respect
to the partnership adjustments is contrary to the statutory scheme
under section 6225(c). The statutory scheme under section 6225, section
6231, and section 6235 envision a process where the IRS first mails a
NOPPA to the partnership that includes the proposed partnership
adjustments and proposed imputed underpayment, followed by a
modification period, which is followed by the FPA. The mailing of the
NOPPA starts the 270 day period within which anything required to be
filed or submitted in the modification process must be filed or
submitted to the IRS. After the close of this 270-day period, which may
be extended with the consent of the IRS, if modification is requested,
the IRS has an additional 270 days to modify the imputed underpayment
as necessary to reflect approved modifications and mail the FPA, which
will describe the final partnership adjustments and imputed
underpayment. After the FPA is issued, there is no basis for the IRS to
consider further modifications. The examination is complete and the
partnership may then pay the imputed underpayment or elect the push
out. The partnership may also challenge the partnership adjustments in
court.
Section 6225(c)(2), which provides the procedures for filing
amended returns and the alternative procedure to filing amended returns
was enacted at the same time as section 6225(c)(7). The amended return
modification and the alternative procedure to filing amended returns
are just two of many statutory modifications. Had Congress intended for
there to be an exception to the 270-day period under section 6225(c)(7)
for amended return modification, as suggested by the comments, Congress
could have included such an exception
[[Page 6491]]
when enacting both statutory provisions.
Second, extending the 270-day period beyond the date of the
issuance of the FPA could result in several tax administration issues
for the IRS. Section 6225(c)(8) provides that any modification of the
imputed underpayment amount ``shall be made only upon approval of such
modification by the Secretary.'' A request for amended return
modification must therefore be approved by the IRS. If the partnership
fails to comply with the requirements under the rules under Sec.
301.6225-2, the IRS may decline to approve the request for
modification. In order to adopt the comment's suggestion that amended
returns and associated payments not be provided until after the FPA is
issued, the IRS would need to wait to approve the modification request
with respect to that amended return until after the partnership and its
partners submitted what was required to be provided under the
modification rules. This would prevent the IRS from including its
approval or disapproval of the modification request in the FPA,
delaying a determination with respect to the modification until some
later date. The FPA--the notice of final partnership adjustment--is
designed to be the final notice to the partnership from IRS, not an
interim notice subject to further modifications or changes.
A partnership adjustment is defined under section 6241(2) as an
adjustment to a partnership-related item, and a partnership-related
item is defined as including an imputed underpayment. An adjustment to
an imputed underpayment is, therefore, a partnership adjustment as
defined in section 6241(2). The approval of a modification affects the
amount of an adjustment that is taken into account in the imputed
underpayment under the rules described in Sec. 301.6225-2(b).
Therefore, the IRS must approve or disapprove of a modification before
the expiration of the time period for making adjustments under section
6235 or the IRS will have lost its opportunity to do so. Relatedly, and
in addition to the concern about the statute of limitations, if the IRS
waits until after the issuance of the FPA to make further adjustments
to the imputed underpayment, modification could extend for an
indefinite period of time, which would lead to uncertainty and
administrative challenges for the partnership, the partners, and the
IRS. This is particularly true with respect any adjustments after the
mailing of the FPA because the mailing of the FPA imbues the
partnership with certain rights, such as the right to petition a court
for a readjustment of the partnership adjustments in the FPA and to
elect the push out under section 6226 with respect to the imputed
underpayment. The comment does not explain how a rule that would allow
the IRS to further alter the imputed underpayment after the partnership
has elected push out or petitioned a court for a readjustment would
work. Such a rule would raise numerous tax administration concerns and
potentially cause confusion for the partnership and its partners as to
what the IRS finally determined and when.
In addition, the IRS is limited as to when it may make a
partnership adjustment. According to section 6235(a)(2), ``no
adjustment under this subchapter for any partnership taxable year may
be made after . . . in the case of any modification of an imputed
underpayment under section 6225(c), the date that is 270 days
[including extensions] . . . after the date on which everything
required to be submitted to the Secretary pursuant to such section is
so submitted.'' In order to adopt the comment allowing an extension of
the 270-day modification submission period beyond the issuance of the
FPA, the IRS would be required to issue two FPAs. The first FPA would
address the partnership adjustments and the imputed underpayment prior
to consideration of modifications. The second FPA would be issued at
some later date before the expiration of the period for making
adjustments under section 6235. Nothing in section 6235(a)(2) prevents
the IRS from mailing a second FPA; however, under section 6231(c), if
the partnership petitions the original FPA under section 6234, the
Secretary may not mail another notice with respect to the same taxable
year in the absence of fraud, malfeasance, or misrepresentation of a
material fact. In other words, in the situation contemplated by the
comment, in which a partnership petitioned the FPA, in general, the IRS
could not issue a second FPA to approve or deny modification issues
because the IRS would be prevented from doing so under section 6231(c).
Adopting the comment's suggestion would prevent the IRS from
exercising the discretion to approve modification for which Congress
provided it authority in section 6225(c)(8). The IRS needs this
discretion to ensure that requests for modification are appropriate for
the partnership and that the administrative proceeding process is
uniform between partnerships. Partners also have other options, such as
subsequent amended returns, to address some concerns regarding making
payments during the modification process. Accordingly, the regulations
have not adopted this comments suggestion.
Proposed Sec. 301.6225-2(d)(2)(vii)(B) provided that if a relevant
partner files an amended return for purposes of modification, such
partner may not file a subsequent amended return without the permission
of the IRS. One comment recommended that the regulations clarify that
the restriction in proposed Sec. 301.6225-2(d)(2)(vii)(B) relates to
only those items related to a partnership adjustment. Similarly,
another comment recommended that the IRS ease the restriction on the
ability of a taxpayer using the amended return modification procedure
to file subsequent amended returns when the subsequent amended return
does not affect the items included in the partnership's audit
adjustments. The comment stated that requiring a taxpayer to request
permission from the IRS before filing an amended return is an
administrative burden in terms of time and resources for both the
taxpayer and the IRS.
Another comment recommended that the regulations not prohibit a
partner who has amended her return as part of the modification process
from amending her return again without the permission of the Service.
This comment suggested revising the forms for filing amended returns to
(1) include a check-box asking whether the taxpayer filed a prior
amended return for that same tax year that was the basis for a
modification under section 6225(c) and (2) require any taxpayer who
answers in the affirmative to attach to the subsequent amended return
an explanatory statement and certain related documents, such as the
prior amended return. Another comment recommended the regulations
clarify that if a partner filed an amended return and paid tax on its
share of adjustments, and modification was approved with respect to the
amended return, the partner may later claim a refund of the tax paid if
the partnership successfully appeals or contests the adjustment.
The final regulations clarify that the restriction under Sec.
301.6225-2(d)(2)(vii)(B) only applies to subsequent amended returns
that change the treatment of partnership adjustments previously taken
into account on a prior amended return that was filed during
modification or are filed with respect to an imputed underpayment that
was taken into account on a prior modification amended return. The
final regulations also removed the requirement that limited further
amended returns filed with respect to an imputed underpayment. The
final regulations
[[Page 6492]]
provide exceptions to this rule if the modification amended return or
all modifications become inapplicable to the reviewed year. For
instance, a court could determine after the issuance of the FPA that
the IRS's determination was erroneous in whole or in part, and there
was no longer an imputed underpayment or the imputed underpayment
should be reduced. In that case, the amended returns submitted during
modification would have been with respect to an imputed underpayment
that either no longer existed or was altered. The modifications in that
case would either be wholly or partially inapplicable. Alternatively,
during the modification process, after a partner files an amended
return for purposes of modification, the IRS could deny modification
under Sec. 301.6225-2(c)(2)(i). In those cases, the partner may file a
subsequent amended return to reverse the treatment of partnership
adjustments taken into account as part of the request for modification
that is no longer applicable, subject to the period of limitations
under section 6511. In response to the comment, the final regulations
also remove the requirement that the partners request permission before
filing subsequent amended returns. The final regulations also clarify
that the restrictions on amended returns also apply to other claims for
refund.
One comment recommended clarification about whether and how the
partner can file a request for refund if the IRS denies a modification
based on a partner's filing of an amended return and payment of tax (or
the use of the alternative procedure to filing amended returns) or if
the partnership files a petition in court of the FPA which results in
an adjustment in the partnership's favor. The same comment requested
clarification on how a taxpayer who has filed an amended return or
executed a closing agreement under section 6225 would receive the
benefit of the reduced tax liability of the revised adjustment amount.
Pursuant to section 7121, a closing agreement approved by the IRS is
final and conclusive. Accordingly, as a general rule, a partner may not
request a refund of amounts agreed to in, and paid with, a closing
agreement, though the determination of whether a partner could file
further amended returns or claims for refund with respect to a year in
which a closing agreement was executed would depend on the facts and
circumstances and the agreed upon terms of the closing agreement. As
discussed earlier in this Summary of Comments and Explanation of
Revisions, the final regulations under Sec. 301.6225-2(d)(2)(vii) now
clarify that partners may file additional amended returns with respect
to partnership adjustments or imputed underpayments, including in the
case of denied modification or court readjustment. To file a subsequent
amended return, the partners must do so in accordance with forms,
instructions, and other guidance prescribed by the IRS. A partner that
modifies using the alternative procedure to filing amended returns as
described in section 6225(c)(2)(B) that seeks a refund for an amount
paid as part of those procedures must follow the rules of Sec.
301.6225-2(d)(2)(vii)(B) and (C). There is no separate process for
partners that modify using the alternative procedure to amended
returns.
Former proposed Sec. 301.6225-2(d)(2)(vii) provided that a pass-
through partner may elect, solely for the purposes of modification, to
take into account its share of the partnership adjustments and make a
payment on behalf of its partners. If modification was approved with
respect to the pass-through partner, the partnership was not permitted
to request modification based on amended returns filed by upper-tier
direct and indirect partners of the pass-through partner. Former
proposed Sec. 301.6225-2(d)(2)(vii). One comment suggested that the
regulations should permit a modification of a pass-through partner's
payment amount based on amended returns filed by its upper-tier owners.
This suggestion was adopted in the August 2018 NPRM revisions to
Sec. 301.6225-2(d)(2). Proposed Sec. 301.6225-2(d)(2)(vi)(B), as
revised in the August 2018 NPRM, provided that in accordance with
forms, instructions, and other guidance, a pass-through partner making
a payment under Sec. 301.6225-2(d)(2)(vi)(A) may take into account
modifications with respect to its direct and indirect partners to the
extent that such modifications are requested by the partnership and
approved by the IRS. Therefore, to the extent an upper-tier partner of
the pass-through partner has filed an amended return, the partnership
has requested modification with respect to that amended return, and the
modification is provided, the pass-through partner may take into
account that amended return in accordance with forms, instructions, or
other guidance when making a payment in modification. The final
regulations under Sec. 301.6225-2(d)(2)(vi)(B) retain this rule.
Another comment recommended that the regulations provide more
guidance regarding the form required for an amended return filed by a
pass-through partner and the information that form will need to
contain. This comment was not adopted. The form required for any
amended return, including an amended return filed by a pass-through
partner, and the information required on that form will be set forth in
forms, instructions, and other guidance prescribed by the IRS. Setting
forth this information in forms, instructions, and other guidance gives
the IRS the flexibility to adapt the form and its contents without
having to amend the regulations. This flexibility preserves government
resources and expedites the time in which taxpayers will know of
changes to the statement requirements. At the same time, the IRS
recognizes the need of taxpayers to know of the information required in
order to comply with the regulations. The IRS plans to develop and
release drafts of forms and instructions for public inspection as they
are completed.
Another comment recommended that the regulations address the
situation in which a partner files an amended return but incorrectly
calculates the interest amount due and subsequently receives an
additional assessment from the IRS. The comment expressed concern that
the incorrect calculation of interest and resulting shortfall in
payment may result in an inadvertent denial of the modification
request. Another comment recommended a rule that a de minimis shortfall
of interest or penalties resulting from a good faith effort by a
taxpayer to calculate the correct amount shall not result in a denial
of a modification request.
The comment recommending a good faith de minimis rule to address
situations in which a partner has a shortfall of interest or penalties
was not adopted. First, allowing a good faith de minimis rule for
interest or penalties is inconsistent with the centralized partnership
audit regime's approach of allowing modification of the imputed
underpayment if partners fully account for adjustments by taking them
into account, paying any resulting amounts due as if the partnership
and partners had reported correctly the first time. Because amended
return modification is occurring years after any tax would have been
due as a result of the partnership adjustment, partners with an
underpayment must pay interest to compensate the government for the
time value of money on the underpayments. Similarly, partners that owe
a penalty must pay that penalty to fully take into account the
adjustments and allow the partnership the benefit of modification for
those adjustments. A de minimis rule that affirmatively blessed some
[[Page 6493]]
dollar amount or percentage shortfall for either interest or penalties
would encourage taxpayers to calculate their interest and penalties to
fall within the allowed de minimis range to avoid disallowance but pay
less than is required. It is inconsistent with the collection of
amounts determined due on examination to systematically allow a
collection of less than all that is due.
Second, administering a rule that allowed partners to underpay what
is owed under Sec. 301.6225-2(d)(2)(ii)(A) as long as they made a good
faith effort and had only a de minimis short fall would result in
untenable administrative complexities for the IRS. The IRS must review
all modification requests within 270 days after the modification
request has been submitted. The IRS will need to quickly ensure that
all relevant partners have provided all information and payments
necessary to approve modification. A rule that includes a good faith
element would require the IRS to engage in a partner-specific inquiry
with respect to any shortfall that might be within the de minimis range
to determine whether partner made a good faith effort to comply. A rule
that looks to the intent of the partner in determining the amount of
interest and penalties is factually intense and would require an
inquiry into the state of mind of the partner or that partner's tax
advisor. In a fraction of the time it would take to make such an
inquiry, the IRS could instead request and receive full payment from
the partner. Therefore, it is not administrable to inject this
additional, burdensome good faith de minimis shortfall rule in the
final regulations, when the current requirement of full pay is both
more administrable and less burdensome on the IRS and partners.
If the partnership representative becomes aware of the shortfall
before expiration of the 270-day period, the partnership representative
may request an extension of the 270-day period in order to allow for
full payment to be made before the modification period ends. In this
way, the partnership representative can take steps to ensure that all
requirements under Sec. 301.6225-2(d)(2) were satisfied.
Proposed Sec. 301.6225-2(d)(2)(ii)(C) provided that in the case of
a reallocation adjustment, all partners affected by such adjustment
must file amended returns in order for the IRS to approve modification
with respect to those amended returns. One comment suggested that the
partners affected by the reallocation adjustment should be required to
file amended returns only if there is evidence of a net underpayment of
tax by the partners as a whole. The comment suggested as an alternative
that the partners be allowed to attach an explanation or information
statement to their adjustment year return rather than filing an amended
return for the reviewed year. These suggestions were not adopted.
Section 6225(c)(2)(C) provides that in the case of a reallocation
adjustment, amended return modification applies only if all the
requirements of either amended return modification or the alternative
procedure to filing amended returns ``are satisfied with respect to all
partners affected by such adjustment.'' The statute does not provide
any exception to this rule, including an exception for situations in
which there is evidence of a net underpayment of tax. Accordingly, the
final regulations retain the rule that all partners affected by a
reallocation adjustment must file amended returns or utilize the
alternative to filing amended returns in order for modification to be
approved. This rule ensures that all relevant partners affected by the
reallocation adjustment take into account their appropriate shares of
that adjustment and thereby ensures such partners receive the
appropriate tax benefits for the taxable year subject to the
adjustment.
Furthermore, payment and collection of an underpayment is not the
only issue required to be resolved by the filing of modification
amended returns. In some cases, the purpose of the amended returns is
to take into account the tax attributes that may have effects on other
modification years. Certainly, in some cases, the tax effect of
adjustments taken into account in one year may be offset by tax effect
of adjustments in another year or by another partner, but as described
in section 3.A. of this preamble, the unmodified imputed underpayment
is designed by statute to take into account only the reviewed year and
it does not take into account the specific tax attributes of any
partner or the effects of the partnership adjustments in modification
years or intervening years. An unmodified imputed underpayment will
often result in an amount that is higher than what the partners
collectively would have paid had they taken the adjustments into
account properly in the reviewed year. The unmodified imputed
underpayment protects the IRS's interests in collecting at least the
amount of tax that should have been paid by the partners without having
to separately examine and track all the partners. In other words, the
unmodified imputed underpayment represents a simple way to allow the
partnership to pay, and the IRS to collect, as amount related to the
partnership adjustments without having to delve into the specific tax
attributes of each partner.
Modification, however, provides an opportunity for the partners and
the partnership to demonstrate that specific tax attributes of partners
should have an effect on the imputed underpayment. With respect to
reallocation adjustments, if partners seek to receive the benefit of
modification, each partners subject to a reallocation adjustment must
follow the statutory requirement to file amended returns for all
adjustments in a reallocation adjustment. It may be the case that one
partner pays on modification and another partner is entitled to a
refund. However, such a result is unknown until the partners
demonstrate that fact through modification. More importantly, section
6225(c)(2)(C) expressly requires that all partners have taken into
account all partnership adjustments and related tax attributes for the
modification years and future years. This statutory mandate makes clear
that the purpose of this modification is not to ensure that there is a
net tax payment with respect to the partnership adjustments, but
instead to ensure that the proper partners have taken the adjustments
into account correctly, including in all modification years. The
requirement that all partners affected by a reallocation file amended
returns is a necessary condition for modification to be approved.
Similarly, the comment's suggestion that partners attach a
statement to their adjustment year returns attesting to the fact that
they had a net underpayment as a result of the adjustments is not
workable. In an administrative proceeding, the adjustment year is the
year in which the FPA is mailed under section 6231 or, if the
partnership challenges the adjustments in court, the year such decision
becomes final. Section 6225(d)(2). If a partner was one of the partners
subject to a reallocation adjustment and failed to file an amended
return, none of the other amended returns from other partners subject
to the reallocation adjustments could be approved as a modification. As
a result, the imputed underpayment would be determined in the FPA
without reduction with respect to those adjustments. Attaching a
statement on the next filed return of the partner that failed to file
an amended return would have no effect on the imputed underpayment
already finally determined.
Recognizing the costs and burdens this rule may create for
partnerships, partners, and the IRS in cases where it
[[Page 6494]]
is clear one partner will not owe tax on its share of a reallocation
adjustment, the Treasury Department and the IRS included a rule within
proposed Sec. 301.6225-2(d)(2)(ii)(C) to mitigate the potential impact
of the requirement that all partners file amended returns. Proposed
Sec. 301.6225-2(d)(2)(ii)(C) provided that modification may be
approved in the case of a reallocation adjustment even if a relevant
partner affected by the adjustment does not file an amended return or
utilize the alternative procedure provided the partner takes into
account its share of the adjustment through other modifications
approved by the IRS or if a pass-through partner takes into account the
relevant adjustments. 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 Sec. 301.6225-2(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. Proposed Sec. 301.6225-2(d)(2)(ii)(C).
One comment recommended that the regulations clarify whether a tax-
exempt partner eligible for tax-exempt modification under Sec.
301.6225-2(d)(3) and allocated a share of a reallocation adjustment
must file an amended return to satisfy the requirements under Sec.
301.6225-2(d)(2) in order for the IRS to approve a modification request
with respect to such partner. The comment recommended adding to the
regulations either an explicit statement or an example indicating that
such a filing is not necessary provided the IRS is satisfied that the
relevant partner qualifies as a tax-exempt entity. This comment was
partially adopted by adding a sentence to Sec. 301.6225-2(d)(2)(ii)(C)
indicating the IRS may determine the amended return requirement in the
context of reallocation adjustment is satisfied to the extent an
affected relevant partner meets the requirements of Sec. 301.6225-
2(d)(3) regarding tax-exempt partners. The satisfaction of the
requirements of Sec. 301.6225-2(d)(2) (amended return modification and
the alternative procedure) is only satisfied to the extent of the tax-
exempt portion as defined in Sec. 301.6225-2(d)(3)(iii). Therefore, if
certain partnership adjustments allocable to tax-exempt partners are
subject to tax, and the partner wishes to take advantage of amended
return modification, the tax-exempt partner may have to file an amended
return to pay tax on the portion of adjustments allocable to that
partner which are subject to tax. The final regulations do not add an
example to this effect because the plain language of Sec. 301.6225-
2(d)(2)(ii)(C) addresses the point raised by the comment.
One comment recommended that the regulations provide an additional
modification method in the case of reallocation adjustments that would
allow a partner to whom a net negative adjustment is allocated to file
an amended return (or use the alternative procedure to filing amended
returns) to claim a refund of tax arising from such adjustment, on the
condition that the partner to whom the net positive adjustment is
allocated, or the partnership, has paid the tax attributable to the net
positive adjustment. Similarly, another comment recommended that the
regulations permit a modification of an imputed underpayment where only
the partner experiencing additional income (or less deduction, loss, or
credit) as a result of a reallocation adjustment files an amended
return. These comments were not adopted.
As discussed earlier in this section of this preamble, section
6225(c)(2)(C) provides that in the case of a reallocation adjustment,
amended return modification applies only if all the requirements of
either amended return modification or the alternative procedure to
filing amended returns ``are satisfied with respect to all partners
affected by such adjustment.'' This rule demonstrates that reallocation
adjustments made by the IRS under the centralized partnership audit
regime are included in the calculation of the imputed underpayment
unless all partners affected by such adjustments take them into
account. Section 6225(c)(2)(C) does not contain an exception to the
rule that all partners take the adjustments into account. Consistent
with section 6225(c)(2)(C)'s requirement that all affected partners
take the reallocation adjustments into account, the IRS has exercised
its discretionary authority under section 6225(c)(6) to permit
modification in the case of a reallocation adjustment where a relevant
partner affected by such adjustment has met the requirements of another
modification method and that modification has been approved by the IRS.
This regulatory exception fits squarely within the statutory framework
of ensuring that all partners affected by a partnership adjustment take
into account their share of that adjustment and recognize the tax
effects of such adjustments. Adopting the approach suggested by the
comments, one where either only the loss partner or only the income
partner take the adjustments into account, would undercut the statutory
framework and directly contradict the plain language of the statute. A
rule that does not account for all aspects of a reallocation adjustment
would run contrary to the collection mechanism of the centralized
partnership audit regime with respect to reallocation adjustments. The
statutory framework requires either that the partnership pay an imputed
underpayment representing the additional tax effects of the
reallocation adjustment in the adjustment year and take the negative
adjustment aspects into account in that same year or all affected
partners from the reviewed year must fully account for their share of
the reallocation adjustment.
One comment recommended that the regulations clarify whether a
taxpayer filing an amended return or requesting a closing agreement
under section 6225 for purposes of modification is required to take
into account and pay any additional taxes due under chapters 2 and 2A
of the Code. This comment was adopted. The final regulations clarify
that a partner filing an amended return or using the alternative
procedure to filing amended returns only is required to pay tax due
under chapter 1 of the Code with respect to the amended return and the
alternative procedure to filing amended returns. The exception to the
limitation of tax to chapter 1 tax is for a pass-through partner filing
an amended return under Sec. 301.6225-2(d)(2)(vi) because the pass-
through partner, but for Sec. 301.6225-2(d)(2)(vi), might otherwise
not owe tax under chapter 1. Nothing in the final regulations limits
the IRS's authority under section 6241(9). The type of tax paid in a
closing agreement, however, will depend on the terms of the closing
agreement. The final regulations clarify the type of tax paid in these
situations in Sec. Sec. 301.6225-2(d)(2)(ii)(A) and (d)(8).
Another comment asked about the effect on the IRS's approval of
modification in the case that a partnership or partner fails to pay
taxes under chapters 2 and 2A in modification. Because the final
regulations clarify that a partner is only required to pay chapter 1
tax in amended return modification or in the alternative procedure to
filing amended returns, the failure to pay taxes under chapters 2 and
2A is irrelevant to the approval or denial of modification. The
questions asked by the comment are therefore moot, and no changes were
made in response to the comment.
Section 6225(c)(2)(D) provides that section 6501 and 6511 shall not
apply
[[Page 6495]]
with respect to returns filed in modification. A comment was concerned
that amended returns filed after the expiration of the time period in
section 6511 would be automatically rejected by IRS Service Centers,
causing confusion and uncertainty about whether the amended return has,
in fact been filed, and if so, whether it was timely. The comment
recommended that the IRS develop a procedure for the filing of amended
returns with the IRS personnel handling the partnership's examination
so that this person can make sure that the return is filed and properly
processed or alternatively that the regulations directed taxpayers to
include a banner on the top of the amended return stating, in red ink,
``Filed Pursuant to Section 6225(c),'' to alert the Service Center that
this amended return should not be automatically rejected if it is
otherwise untimely under section 6511. Another comment recommended that
the final regulations also require that the reviewed-year partner
include in the affidavit filed with the amended return modification
request the partner's TIN and contact information to enable the IRS to
locate easily the amended return and payment in its databases. The IRS
intends to develop a process through which the partners would file
their amended returns, but the regulations do not specify the details
of that process. The IRS will develop forms and instructions directing
the partnership and the partners as to how and where to file their
amended returns submitted in modification, and the IRS intends to
request the relevant partner's TIN as part of that process.
Prior to the enactment of the TTCA, section 6225(c)(2) stated that
section 6511 did not apply with respect to amended return modification,
but it was silent on whether section 6501 limitations on assessment
applied. If a partner's period under section 6501 was closed at the
time of modification, the partner might not be able to participate in
amended return modification. One comment recommended that the IRS
resolve this issue by allowing partners to extend the relevant section
6501 periods. This comment was received in response to the June 2017
NPRM, prior to the enactment of the TTCA. The TTCA explicitly provided
that section 6501 does not apply with respect to returns filed in
modification, so the need for such extensions no longer exists.
iv. The Alternative Procedure To Filing Amended Returns
The TTCA created an additional statutory modification under section
6225(c)(2)(B), titled the alternative procedure to filing amended
returns (the alternative procedure), which has been referred to as the
``pull in'' or ``push in.'' Several comments recommended that the
Treasury Department and the IRS adopt these procedures in response to
the June 2017 NPRM, prior to the enactment of the TTCA. The August 2018
NPRM proposed rules related to the alternative procedure, adopting
those comments in response to the enactment of the TTCA, which included
the alternative procedure.
One comment suggested that the final regulations should include a
modification procedure whereby an imputed underpayment is reduced when
the partnership provides sufficient evidence that the adjustments
underlying the imputed underpayment would have resulted in a smaller
imputed underpayment if they had been taken into account according to
how the partners and the partnership actually treated the partnership-
related item. The comment described this concept as similar to the
``pull-in'' procedure included in the TTCA. The comment has not been
adopted in its entirety because no one modification provision
specifically allows the partnership to demonstrate that the imputed
underpayment would be reduced if the partnership and partners had taken
the adjustment into account. The purpose of the modification process is
not only to reduce the amount of the imputed underpayment, but for
those partners that take the adjustments into account as part of the
modification requested, they are required to pay any additional tax,
interest and penalties due and agree to adjust their tax attributes in
exchange for the IRS approving the modification. As such, the
regulations contain rules related to the alternative procedure as
defined in section 6225(c)(2)(B) and Sec. 301.6225-2(d)(2)(x) and
under that procedure the partnership may satisfy the requirements of
amended return modification by submitting on behalf of relevant
partners, in accordance with forms, instructions, and other guidance
prescribed 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 a
modification amended return. The partnership must also demonstrate that
relevant partners have agreed to take into account tax attributes
consistent with taking into account the partnership adjustments
allocable to that partner. The regulations provide another modification
under Sec. 301.6225-2(d)(10), where the IRS will consider any other
request for modification and determine whether it is appropriate in the
circumstances.
Another comment recommended that the modifying partner using the
``push in'' procedure deal directly with the IRS exam team during the
partnership audit because many partners will not want to provide the
details of their financial affairs to the partnership representative or
the partnership. The regulations do not provide specific details as to
what information will need to be provided to the IRS under the
alternative procedure, but the IRS intends to develop such processes.
The partnership, not the partners, however, requests amended return
modification, and the partnership may satisfy those requirements
through the alternative procedure. Because the partnership is
responsible for making the modification request, the comment was not
adopted at this time. The processes the IRS develops may ultimately
provide that the partners submit some information directly to the IRS,
but the partners will likely be required to provide some information to
the partnership representative to request modification. Nothing in the
regulations prevents the partnership from working with third parties or
selecting a partnership representative that will not share the details
of the partners' financial affairs directly with the partnership. The
partnership, the partnership representative, and the partners will
ultimately be required to meet filing requirements established in
forms, instructions, and other guidance.
The same comment also recommended that partners who establish that
they are owed a refund receive such refund through the alternative
procedure rather than by filing an amended return or relying on Sec.
301.6225-3, which allows an adjustment that does not result in an
imputed underpayment to be taken into account in the adjustment year.
The comment recommended that refunds in the alternative procedure
context only be allowed after all relevant partners have paid their tax
and after the partnership has paid any remaining imputed underpayment.
This comment was not adopted. Requests for the alternative procedure
under Sec. 301.6225-2(d)(2)(x) are not claims for refunds for the
reasons described later in this section of this preamble. To the extent
the comment was suggesting that refunds could be claimed after the
issuance of the FPA, which is the point after which the partnership
would have been able to pay the imputed underpayment, the partners may
only do so pursuant to Sec. 301.6225-2(d)(2)(vii).
[[Page 6496]]
One comment recommended that if partnerships and their partners
will be permitted some simplified method of modification (without the
need to file amended returns), the regulations should fully explain
that concept. This comment was made prior to the passage of the TTCA
and the issuance of the August 2018 NPRM. The preamble to the August
2018 NPRM explains the alternative procedure as enacted by the TTCA.
This section of the preamble to these regulations provides additional
explanation of the alternative procedure. In addition to the
regulations, the alternative procedure will be further described in
forms, instructions and other guidance as the IRS processes surrounding
the alternative procedure are developed further.
Another comment requested clarification on the interaction of the
alternative procedure with other provisions described in the proposed
regulations. For instance, the comment stated the language under
proposed Sec. 301.6225-2(d)(2)(x) was unclear whether a taxpayer
reporting a negative reallocation or recharacterization adjustment is
eligible to use the alternative procedure. No changes were made to the
regulations in response to this comment.
There is nothing in the regulations that precludes the partnership
from requesting modification with respect to a relevant partner under
the alternative procedure where the relevant partner would otherwise be
entitled to a refund had the partner instead filed amended returns.
However, the regulations state that a request for modification under
the alternative procedure is not a claim for refund with respect to any
person. As a result, a relevant partner may not make a claim for refund
via the alternative procedure. This rule is based on the statutory
requirement under section 6225(c)(2)(B)(i) that requires a partner to
pay any amount due under section 6225(c)(2)(A)(iii) if the partnership
requests the alternative procedure. If a partner, after taking into
account all partnership adjustments allocable to the partner, would not
owe any amount as required in amended return modification under section
6225(c)(2)(A)(iii), the partner is not required to make a payment as
part of the alternative procedure. The fact that a partner may utilize
the alternative procedure without making a payment does not, however,
allow the partner access to a refund through the alternative procedure.
The alternative procedure as described in section 6225(c)(2)(B)
does not provide that the partners may obtain refunds. The alternative
procedure provides a streamlined process for partners and the
partnership generally to those partners paying additional amounts of
tax, in lieu of filing amended returns. This streamlined nature of the
alternative procedure process also benefits the IRS. By limiting the
alternative procedure to just those relevant partners that are making
payments required under section 6225(c)(2)(B)(i) (or that owe no
additional tax), the IRS should be able to more quickly and efficiently
process requests under the alternative procedure. Partners that have
been allocated negative adjustments, including reallocation or
recharacterization adjustments, may take those adjustments into account
using the alternative procedure but by doing so will forego any claim
for refund of any amounts related to taking those adjustments into
account. In other words, if, for instance, the partner had offsetting
income against which the negative adjustment might be netted, the
partner could utilize the alternative procedure to make whatever
payment resulted from the remaining offsetting income. If the partner
would be entitled to a refund as a result of its allocated adjustments,
the partner must use the amended return procedures to obtain that
refund. Using the amended return procedures allows the IRS to track the
refund appropriately and ensure it is processed efficiently.
The same comment also stated that it was unclear if the alternative
procedure would trigger the restrictions on further amended returns
described in Sec. 301.6225-2(d)(2)(vii)(B). The final regulations
under Sec. 301.6225-2(d)(2)(vii)(B) clarify that the restrictions on
subsequent amended returns or claims for refund apply equally to the
amended return process and the alternative procedure. A subsequent
amended return or claim for refund is most likely to occur outside the
centralized partnership audit regime process. Because the alternative
procedure does not exist outside the centralized partnership audit
regime, there is no method by which a partnership could use the
alternative procedure to obtain a refund of amounts paid during
modification. The partner may file a subsequent amended return,
however, if the circumstances described in Sec. 301.6225-
2(d)(2)(vii)(C) are met.
v. Rate Modification
Under Sec. 301.6225-2(d)(4), a partnership may request
modification based on a lower rate of tax for the reviewed year with
respect to adjustments that are allocable to a relevant partner that is
a C corporation and adjustments with respect to capital gains or
qualified dividends that are allocable to a relevant partner who is an
individual. One comment suggested that the rate modification procedures
accommodate situations in which the sole adjustment is a
recharacterization of capital gain as ordinary income. In that
situation, the adjustment increasing ordinary income is a net positive
adjustment that results in an imputed underpayment, and the adjustment
decreasing capital gain is a net negative adjustment that does not
result in an imputed underpayment. See Sec. 301.6225-1.
The comment recommended revising the rate modification procedures
to provide that an individual partner may file an amended return, or
use the alternative procedure, to establish that the partner previously
paid tax on the recharacterized gain at the lower rate with the result
that the portion of the net positive adjustment allocable to such
partner would be subject to tax only at the difference between the
highest tax rate and such lower rate. In addition, the comment
recommended that the rate modification procedures allow a corporate
partner to demonstrate that it paid tax on capital gain with the result
that the portion of the net positive adjustment allocable to the
corporate partner would be subject to tax at a zero percent rate, as
corporate tax rates on capital gains equal rates on ordinary income.
Rate modification is designed to address situations in which there
is an adjustment to a particular type of income that is allocable to an
individual or an adjustment that is allocated to a corporate taxpayer.
A partnership may demonstrate that a lower rate of tax applies with
respect to that income type or based on the type of taxpayer. Section
6225(c)(4)(A) (flush language) limits the rates that may apply by
providing that ``[i]n no event shall the lower rate determined . . . be
less than the highest rate in effect with respect to the income and
taxpayer . . . .'' Proposed Sec. 301.6225-2(d)(4) provided a rule
consistent with this statutory mandate. For instance, with respect to
an adjustment 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. The comment suggested a rule where the rate applied to the
recharacterized income allocable to the C corporation would be 0
percent because there is no reduced capital
[[Page 6497]]
gains rate for C corporations. Zero is lower than the highest rate
applicable to a C corporation and as a result is not permitted by
statute. Similarly, for the individual in the comment's suggestion, for
taxable year 2018 the highest rate is 37 percent and the highest rate
for capital gains is 20 percent. The difference between these two rates
is 17 percent, which is lower than the highest rate for capital gains
for an individual and as a result not permitted by statute.
Accordingly, the comment was not adopted.
In contrast, the amended return (or the alternative procedure to
filing amended returns) allows a partner to take into account the
partner's share of adjusted items and apply the specific tax rate that
applies to the partner's amount of taxable income. When taking into
account her share of the adjustments, which includes both the
adjustment increasing ordinary income and the adjustment decreasing
capital gain, the partner is able to offset additional partnership
income with any permissible deductions. For example, a partner may
utilize the increase in capital loss to offset the capital gain that
was originally reported and subsequently recharacterized, thereby
reducing the partner's tax on capital gains to potentially zero and
paying tax on her share of ordinary income at the partner's specific
effective tax rate.
To the extent the comment was suggesting that the Treasury
Department and IRS exercise its discretionary authority under section
6225(c)(6), the Treasury Department and IRS decline to do so because
adopting such a rule would present administrability concerns for the
IRS. For example, the corporate partner described by the comment may or
may not have paid tax on capital gain on the corporate partner's
original return; there may have been offsetting capital losses. The
most efficient way from a tax administration perspective for the
partnership and the corporate partner to demonstrate that the corporate
partner previously paid tax on the capital gain is the amended return
process (or the alternative procedure). By filing an amended return,
the corporate partner can take into account the adjusted amount of both
ordinary income and capital loss, and assuming those adjustments could
offset on the corporate return, the corporate partner would owe no
additional tax and the adjustments taken into account by the corporate
partner would be disregarded from the total netted partnership
adjustment. See Sec. 301.6225-2(b)(2). An amended return, or an
alternative procedure submission, allows the IRS to understand better
what the corporation took into account on its original return.
Proposed Sec. 301.6225-2(b)(3) provided rules for calculating an
imputed underpayment in the case of a rate modification. The first step
in determining an imputed underpayment in the case of a rate
modification is to determine each relevant partner's distributive share
of the partnership adjustments based on how each adjustment subject to
rate modification would be properly allocated under section 702 to such
relevant partner in the reviewed year. Proposed Sec. 301.6225-
2(b)(3)(iii)(A). In the case of an adjusted item that was specially
allocated to a partner or group of partners, however, each relevant
partner's distributive share is determined based on the amount of net
gain or loss to the partner that would have resulted if the partnership
had sold all of its assets at their fair market value as of the close
of the reviewed year. Proposed Sec. 301.6225-2(b)(3)(iv).
One comment suggested that the requirement to determine the
partner's distributive share based on a hypothetical sale of all
partnership assets at fair market value as of the close of the reviewed
year is administratively burdensome and difficult for partnerships to
apply many years after the calculation date. The comment also suggested
that the lack of a definition for fair market value in the statute and
in the regulations will generate significant disputes between the IRS
and partnerships. In order to simplify the administration of this rule,
the comment recommended that the regulations should define fair market
value solely for purposes of this rule as a more easily determined
amount, such as using section 704(b) basis. This comment was not
adopted, although the final regulations do provide an alternative
method for determining a partner's distributive share in the case of
special allocations as described later in this section of this
preamble.
Section 6225(c)(4)(B)(ii) provides if an imputed underpayment is
attributable to the adjustment of more than one item, and any partner's
distributive share of such items is not the same with respect to all
such items, then the portion of the imputed underpayment to which the
lower rate applies with respect to such partner shall be determined by
reference to the amount which would have been the partner's
distributive share of net gain or loss if the partnership had sold all
of its assets at their fair market value as of the close of the
reviewed year of the partnership. As discussed later in this section of
this Summary of Comments and Explanation of Revisions, the IRS
recognizes that there may be concerns about the burden a fair market
value analysis might create on both the partnership and the IRS. The
Treasury Department and the IRS considered using the authority under
section 6225(c)(6) to expand modification to use section 704(b) basis,
but the recommendation to use section 704(b) basis is also flawed. Not
all partnerships have section 704(b) basis numbers to which the
partnership and the IRS could refer for modification purposes.
Accordingly, the section 704(b) basis alternative would only be
available to certain partnerships, and the IRS would prefer to provide
an alternative option to the fair market value analysis that would be
available to all partnerships. In addition, there is concern that some
partners may not have accurate records for section 704(b) basis. As
discussed later in this section of the preamble, the Treasury
Department and the IRS did exercise the authority under section
6225(c)(6) to provide an option for special allocation rate
modification that would apply to all partnerships.
The comment suggested, as an alternative to defining fair market
value, that the regulations permit the partnership to request that
adjustments subject to the special allocation rule under Sec.
301.6225-2(b)(3)(iv) be placed in a specific imputed underpayment
separate from other adjustments. The comment suggested this process
would allow for the adjustments to be allocated solely to the affected
relevant partners in the appropriate manner, and also recommended that
the request to designate a specific imputed underpayment in this
context be considered separately from other modification requests.
The process suggested by the comment was arguably permissible under
former proposed Sec. 301.6225-2(d)(6). Under former proposed Sec.
301.6225-2(d)(6), a partnership was permitted to request during
modification that one or more partnership adjustments taken into
account to calculate one general or specific imputed underpayment be
taken into account to calculate a different specific imputed
underpayment. Former proposed Sec. 301.6225-1(e)(2)(iii) had defined a
specific imputed underpayment as an imputed underpayment with respect
to adjustments to an item or items that were allocated to one partner
or a group of partners that had the same or similar characteristics or
that participated in the same or similar transaction. In the case of a
special allocation to a group of partners, however, the partners may
not
[[Page 6498]]
necessarily share the same characteristics or have participated in the
same transaction. Accordingly under former proposed Sec. 301.6225-
1(e)(2)(iii), certain specially allocated items may have been eligible
for placement in a specific imputed underpayment while others may not.
This discrepancy was addressed by the revisions to proposed Sec.
301.6225-1(g)(2)(iii) in the August 2018 NPRM. Proposed Sec. 301.6225-
1(g)(2)(iii) provided that the IRS may designate a specific imputed
underpayment with respect to adjustments to items that were allocated
to a partner or group of partners that had the same or similar
characteristics, that participated in the same or similar transaction,
``or on such other basis as the IRS determines properly reflects the
facts and circumstances.'' A partnership may request designation of a
specific imputed underpayment during the examination or during
modification. See Sec. 301.6225-2(d)(6). Accordingly, because the
process suggested by the comment is contemplated by the proposed
regulations, no change was made in the final regulations to response to
this comment.
With respect to the comment's request for an alternative to fair
market value, the Treasury Department and the IRS recognize that a
determination of fair market value may present challenges for taxpayers
and the IRS. For instance, obtaining a fair market value analysis may
require the hiring of experts by the taxpayer, thereby increasing the
costs of modification. Depending on the type of assets or the amount at
issue, the IRS may need to employ its own experts to ensure that the
taxpayer's analysis is correct. Recognizing these costs and
administrative burdens, the Treasury Department and the IRS have
exercised the authority under section 6225(c)(6) to ``provide for
additional procedures to modify imputed underpayment amounts on the
basis of such other factors as the Secretary determines are necessary
or appropriate'' to carry out the purposes of section 6225(c). Pursuant
to that authority, the final regulations under Sec. 301.6225-
2(b)(3)(iv) allow a partnership requesting rate modifications in the
case of special allocations to determine the distributive share for all
adjustments to which the lower rate applies with respect to all
partners based on the test under either section 6225(c)(4)(B)(i) or
section 6225(c)(4)(B)(ii).
The rule under the final regulations allows partnerships and
partners to request modification based on what they determine is the
most appropriate method to measure partners' distributive shares. This
rule provides an alternative to the fair market value analysis for
partnerships and partners which comments suggested, and the Treasury
Department and the IRS agree, may be too difficult or costly. The rule,
however, does not remove the ability of a partnership to request
modification based on section 6225(c)(4)(B)(ii). The final regulations
also clarify that the distributive share referenced in section
6225(c)(4)(B)(i) is the distributive share as determined in the NOPPA,
and if no determination regarding that distributive share was made in
the NOPPA, the rules of subchapter K of chapter 1 of the Code
(subchapter K).
The same comment also recommended that the regulations clarify that
if the IRS requires a partnership to make the deemed sale calculation
envisioned in proposed Sec. 301.6225-2(b)(3)(iv), the regulations
provide that such action is not considered a revaluation for purposes
of section 704. This comment was adopted. A sentence has been added to
the final regulations under Sec. 301.6225-2(b)(3)(iv) to make clear
that any calculation by the partnership that is necessary for purposes
of complying with the rule under Sec. 301.6225-2(b)(3)(iv) is not a
revaluation for purposes of section 704.
vi. Certain Passive Losses of Publicly Traded Partnerships
Proposed Sec. 301.6225-2(d)(5) provided rules for modification
regarding certain passive activity losses of publicly traded
partnerships. Pursuant to proposed Sec. 301.6225-2(d)(5), in the case
of a publicly traded partnership that is a relevant partner, an imputed
underpayment is determined without regard to the portion of any
adjustment the partnership demonstrates would be reduced by a specified
passive activity loss which is allocable to a ``specified partner.''
Proposed Sec. 301.6225-2(d)(5)(iii) defined specified partner as a
person that is a partner of a publicly traded partnership; that is an
individual, estate, trust, closely held C corporation, or personal
service corporation; and that has a specific passive activity loss with
respect to the publicly traded partnership. One comment recommended
that the definition of specified partner include partnerships to
accommodate persons that hold an indirect interest in a lower-tier
partnership that is under examination through one or more upper-tier
partnerships. The final regulations do not adopt this definition of
specified partner, but the final regulations do accommodate persons
that hold an indirect interest in the partnership under examination.
In the August 2018 NPRM, the Treasury Department and the IRS used
the authority under section 6225(c)(6) to create a second type of
partner, a qualified relevant partner, that was eligible for
modification under Sec. 301.6225-2(d)(5). A qualified relevant partner
is a relevant partner that meets the requirements of a specified
partner for each year starting with the first affected year through the
last year for which a return was filed by the partnership. To address
the recommendation made by the comment to accommodate indirect
partners, the final regulations provide that an indirect partner may
also be a qualified relevant partner, and therefore be eligible for
modification under Sec. 301.6225-2(d)(5), if the indirect partner is
an individual, estate, trust, closely held C corporation, or personal
service corporation and has a specified passive activity loss with
respect to the publicly traded partnership.
Former proposed Sec. 301.6225-2(d)(5) had provided that
modification for certain passive losses of publicly traded partnerships
applied equally with respect to a publicly traded partnership subject
to a proceeding under the centralized partnership audit regime and
where a portion of the imputed underpayment was attributable to a
publicly traded partnership that is a partnership-partner. Proposed
Sec. 301.6225-2(d)(5) was revised in the August 2018 NPRM to provide
that Sec. 301.6225-2(d)(5) applies in the case of a publicly traded
partnership that is a relevant partner. The final regulations provide
that modification under Sec. 301.6225-2(d)(5) applies only to the
publicly traded partnership requesting modification under Sec.
301.6225-2 (that is, the partnership under examination). This change
makes the modification procedures under Sec. 301.6225-2(d)(5) more
administrable for the IRS because only the partnership under
examination may request modification under Sec. 301.6225-2(d)(5). In
this way, the change also makes modification Sec. 301.6225-2(d)(5)
consistent with other types of modification. Because the final
regulations accommodate certain indirect partners of the publicly
traded partnership requesting modification, this change should not
substantially affect the number of publicly traded partnerships and
partners eligible for modification under Sec. 301.6225-2(d)(5).
Another comment observed that section 6225(c)(5) required certain
actions and calculations based on information that would not be known
until the adjustment year. Pursuant to
[[Page 6499]]
section 6225(d), the adjustment year in the case of an administrative
proceeding is the year in which a case is fully adjudicated under
section 6234, or if no petition is filed under section 6234, when the
FPA is mailed. A modification request must be submitted within 270 days
of the issuance of the NOPPA, which must be mailed before the FPA. See
section 6231(b)(2)(A). As a result of these rules, section 6225(c)(5)
does not operate properly in the case of an administrative proceeding.
When the partnership submits modification under section 6225(c)(5), the
partnership cannot know what the adjustment year is, much less what tax
effects there might be in that year. The only circumstance in which
section 6225(c)(5) operates properly with respect to the adjustment
year is if an AAR has been issued. This is because under section
6225(d) the adjustment year in the case of an AAR is the year in which
the AAR is filed.
To address these incongruences, the comment recommended that the
regulations allow a publicly traded partnership to reduce an imputed
underpayment based on a net decrease in the passive activity loss
allocable to a specified partner in the reviewed year to the extent the
partnership takes such loss into account in the taxable year
immediately preceding the year in which the NOPPA is issued. This
comment was not adopted, but the concerns it raises were addressed in
the August 2018 NPRM. In the August 2018 NPRM, the Treasury Department
and the IRS used the authority under section 6225(c)(6) to provide that
the partnership may request modification under Sec. 301.6225-2(d)(5)
with respect to the adjustment year or the most recent year for which
the publicly traded partnership has filed a return under section 6031.
The Treasury Department and the IRS acknowledge that the most
recent year for which a return was filed may not always be the year
immediately before the issuance of the NOPPA, as in the rule suggested
by the comment. However, using the taxable year for the most recently
filed return allows the publicly traded partnership to refer to
whatever return is the most recently filed, even if that return was
filed shortly after the issuance of the NOPPA. This flexibility allows
the partnership to take into account the information known as of the
most recent tax year. If the rule were to require the publicly traded
partnership to take into account information from a return filed before
the issuance of the NOPPA, as suggested by the comment, the return
filed before the issuance of the NOPPA might not be the most recent
return. For example, the return filed prior to the issuance of the
NOPPA could have preceded the NOPPA by several months. After the NOPPA
was issued and at the time the partnership is considering submitting a
modification request, the partnership could have filed the next year's
return reflecting the next year's passive activity losses, which might
differ from the losses reported on the return filed prior to the
issuance of the NOPPA. The Treasury Department and the IRS have an
interest in ensuring that the most current tax amounts are used in
determining whether a modification request under Sec. 301.6225-2(d)(5)
should be approved. Given this interest, the rule in the final
regulations uses the most recently filed return, rather than the
comment's suggestion to use the return filed before the issuance of the
NOPPA.
In addition, the rule suggested by the comment would require the
partnership to know what adjustments would be included in the NOPPA and
make adjustments on its return to take such adjustments into account,
prior to the issuance of the NOPPA. If the adjustments in the NOPPA
somehow differed from the adjustments the partnership took into account
on its return, the modification might be denied because the partnership
failed to take those adjustments into account. The comment's
suggestion, therefore, has its own timing issues. The final regulations
provide more flexibility for the partnership to reflect the information
known as of the last return filed without requiring the partnership to
predict what may or may not be in the NOPPA and on which day the NOPPA
will be issued. Accordingly, although the final regulations did not
adopt the comment per se, the final regulations adopted an alternative
solution to the problem identified by the comment.
The same comment recommended that the final regulations allow a
publicly traded partnership to request modification of the imputed
underpayment after the end of the adjustment year. Specifically, the
comment recommended that the final regulations require the modification
request to be submitted within 74 days of the end of the adjustment
year, which roughly aligns with the original due date of the
partnership tax return. The procedure recommended by the comment is not
administrable for the IRS for the same reasons discussed earlier in
section 3.B.iii. regarding accepting amended return payments after the
issuance of the FPA. Because the FPA is the mechanism through which
modification is approved or denied, the modification determination must
be made prior to the issuance of the FPA.
The comment stated that any post-FPA modification request would
cause the FPA and a denial of the modification request to be subject to
judicial review separately. This statement is inaccurate. If the
partnership seeks judicial review under section 6234 with respect to an
FPA, in the absence of a showing of fraud, malfeasance, or
misrepresentation of a material fact, the IRS is precluded from mailing
another FPA to such partnership with respect to such taxable year.
Section 6231(c). Accordingly, if the IRS issued an FPA within the time
frames discussed earlier in section 3.B.iii. regarding amended return
payments, and the partnership seeks judicial review of that FPA, the
IRS would be prevented from issuing a later FPA dealing with the
modification request. If the partnership submitted its modification
request after the partnership had already received judicial review with
respect to the adjustments in the FPA, the IRS generally could not mail
an additional FPA approving or denying the modification request, and
the partnership would have no determination concerning its modification
request which it could challenge in court under section 6234.
Accordingly, this comment was not adopted.
The same comment requested that the IRS include the denial of any
modification request in the FPA to ensure that any Tax Court proceeding
will also address the dispute regarding the requested modification.
This comment was not adopted. Whether and how disputes regarding
modification requests are subject to judicial review by a court is not
within the purview of the Treasury Department's or the IRS's regulatory
authority. However, to assist with any potential judicial review of
modification, the IRS plans to use the FPA as the method for approving
or denying modification. The final regulations do not specify, however,
what is required to be included in the FPA for purposes of approving or
denying modification. The absence of a regulatory rule in this regard
provides the IRS flexibility to allow for the differing circumstances
of each administrative proceeding and varying types of modification
requests.
The final regulations in Sec. 301.6225-2(d)(5) describe the
requirements for modification by publicly traded partnerships under
section 6225(c)(5). This section does not require the
[[Page 6500]]
partnership requesting modification to provide any particular
information about partners to the IRS, but the partnership must meet
the general requirement to provide all information necessary to approve
the modification as described in Sec. 301.6225-2(c)(2). Specifically,
Sec. 301.6225-2(c)(2)(i) provides that the IRS may set forth in forms,
instructions, and other guidance the information necessary to request
modification. One comment requested that the partnership be able to
provide summary information with respect to modification under Sec.
301.6225-2(d)(5). The comment specifically suggested that the
regulations provide that a partnership can substantiate the
availability of specified passive activity losses by providing summary
schedules reflecting the specific allocations to each specified partner
of the partnership from the year such partner purchased units through
the year the partnership receives the FPA.
This comment was received in response to the June 2017 NPRM, prior
to the addition of the definition of qualified relevant partner. The
definition of qualified relevant partner allows partners to be eligible
for modification under Sec. 301.6225-2(d)(5) provided they are
partners through the year for which the most recent partnership was
filed. For purposes of the comment, however, the Treasury Department
and the IRS view this comment as suggesting that the partnership would
provide such information for whatever years are relevant for the
modification.
The final regulations do not specify what specific information is
required for modification under Sec. 301.6225-2(d)(5). Therefore, the
regulations do not address whether summary schedules would be
appropriate. The IRS intends to issue forms and instructions for
modification procedures which will provide additional information on
what will be required for modification procedures under Sec. 301.6225-
2(d)(5).
Section 301.6225-2(d)(5)(v) requires that the partnership report,
in accordance with forms, instructions, and other guidance prescribed
by the IRS, to each specified partner or qualified relevant partner the
amount of the reduction in suspended passive loss carryovers. One
comment suggested that the easiest way to do so is to incorporate such
reporting into the Schedules K-1 distributed to such partner at the end
of the adjustment year. This comment was received in response to the
June 2017 NPRM. Therefore, it could not have taken into account the
rule from the August 2018 NPRM that allowed for use of the year of the
most recently filed return. The final regulations do not specify the
manner in which information must be reported under Sec. 301.6225-
2(d)(5)(v). Rather, the regulations defer the manner of reporting to
forms and instructions. This provides flexibility to the IRS to gain
experience with the forms it intends to develop for purposes of
assisting partnerships in complying with the reporting requirements of
Sec. 301.6225-2(d)(5)(v) and to change those forms in response to
taxpayer feedback, if necessary, without needing to amend the
regulations.
In light of the change to allow certain indirect partners to
utilize modification under Sec. 301.6225-2(d)(5), the final
regulations under Sec. 301.6225-2(d)(5)(v) provide that the IRS may
require reporting to an indirect partner that is a qualified relevant
partner through forms, instructions, or other guidance. This rule
allows the IRS flexibility to evaluate and adapt reporting requirements
concerning indirect partners as the IRS and partnerships gain more
experience with the centralized partnership audit regime.
vii. Modification Relating to Qualified Investment Entities
Proposed Sec. 301.6225-2(d)(7) provided that a partnership may
request a modification of an imputed underpayment 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). Under Sec. 301.6225-2(c)(3)(i), the partnership must provide
all information required to request modification (including
modification for deficiency dividends paid by a QIE partner) on or
before 270 days after the issuance of the NOPPA. A partnership may
request an extension of this 270-day period, subject to the consent of
the IRS. Section 301.6225-2(c)(3)(ii).
Several comments suggested that it is not ideal for a QIE partner
to pay a deficiency dividend with respect to an amount or an adjustment
that may not be final. The comments were specifically concerned that
issues may be unresolved during the 270-day period after the issuance
of the NOPPA because of possible review by IRS Appeals. The comments
recommended that the IRS grant extensions of the 270-day period under
Sec. 301.6225-2(c)(3)(i) as a matter of course until all relevant
issues concerning the adjustments have become final.
The IRS plans to adopt procedures under which the partnership will
have an opportunity to resolve with IRS Appeals any issues with respect
to the adjustments made during the examination prior to the mailing of
the NOPPA. Therefore, all issues with respect to the adjustments will
generally be resolved at the administrative level prior to the mailing
of the NOPPA and the start of the 270-day modification period. Because
a request for modification under Sec. 301.6225-2(d)(7) will not be
submitted until after the NOPPA has been mailed, the partnership and
its QIE partners should know with certainty what adjustments are agreed
and which are unagreed at the time of the modification request. This
timing will allow the partnership and its QIE partners to evaluate the
best method for modification and to determine whether modification
under Sec. 301.6225-2(d)(7) is appropriate. Accordingly, a rule
requiring the granting of extensions of the 270-day period as a matter
of course is not necessary.
Moreover, whether an extension of the modification period is
appropriate is a determination best made on the facts and circumstances
of a particular case. A rule requiring automatic granting of extensions
would deprive the IRS of the ability to evaluation an extension request
based on the facts and circumstances. Therefore, the final regulations
do not require granting extensions of the 270-day period as a matter of
course. Lastly, the regulations provide the IRS with the authority to
grant an extension of the 270-day period when warranted, which also
protects the partnership in cases that it may be initially unclear
whether modification under Sec. 301.6225-2(d)(7) is appropriate.
Another comment suggested that the regulations require payment of a
deficiency dividend no later than 60 days after the date the
partnership adjustments are finally determined, rather than after the
NOPPA is mailed during the 270-day modification period. Another comment
recommended that the regulations provide that the allowance of a
deficiency dividend be agreed to in advance of a NOPPA, but in the
event of a challenge to the underlying substantive adjustment in IRS
Appeals or in court, the allowance does not become effective until
final resolution of the underlying challenge. The final regulations do
not adopt these suggestions.
First, as discussed earlier in this section of this preamble, the
IRS Appeals process that the IRS intends to implement will already have
determined which substantive adjustments are agreed to prior to the
issuance of the NOPPA. As a result, the most likely avenue for a
substantive challenge after modification will be in court and not with
IRS Appeals.
[[Page 6501]]
Second, pursuant to section 6225(c)(7) and Sec. 301.6225-
2(c)(3)(i), everything required to submitted with respect to a
modification request must be provided to the IRS within 270 days after
the mailing of the NOPPA. The 270-day period is designed to ensure a
timely resolution of the audit while also providing the partnership
enough of an opportunity to modify an imputed underpayment reflected in
a NOPPA. A rule allowing modifications after that 270-day period
expires would undermine those goals.
Third, allowing modifications after the adjustments are finally
determined precludes the IRS from approving modifications in the FPA.
As discussed in section 3.B.ii of this preamble, the IRS plans to adopt
procedures under which it will approve or deny each modification
request in the FPA. Accordingly, the regulations do not permit
modifications to be submitted beyond the 270-day period described in
Sec. 301.6225-2(c)(3)(i).
One comment recommended that the regulations clarify that a
partnership's receipt of a NOPPA is not a ``determination'' that begins
the 90- or 120-day period for a QIE partner's issuance and claiming of
a deficiency dividend deduction under section 860. Section 860(e)(1)-
(4) provides that a ``determination'' means (1) a court decision; (2) a
closing agreement; (3) an agreement signed by the Secretary and by the
QIE relating to the QIE liability for tax; or (4) a statement by the
QIE attached to its amendment or supplement to a tax return. A NOPPA
does not fall into any of these four categories. Accordingly, a NOPPA
is not a ``determination'' for purposes of section 860(e). Moreover,
Sec. 301.6225-2(d)(7)(ii) requires that the partnership provide
documentation of the QIE partner's ``determination'' described in
section 860(e) as part of the partnership's request for modification.
This rule makes clear that the determination in this context is the
determination with respect to the QIE partner, which does not, by
definition, include the NOPPA mailed to the partnership. Accordingly,
because section 860(e), when read together with proposed Sec.
301.6225-2(c)(7)(ii), addresses the comment's recommendation, the
comment was not adopted.
viii. Closing Agreement Modification
Proposed Sec. 301.6225-2(d)(8) provided that a partnership may
request modification based on a closing agreement between the IRS and
the partnership or between the IRS and a relevant partner, or both. One
comment expressed concern that some partners might not want to
negotiate the details of their tax return through the partnership
representative and recommended that the regulations outline procedures
for partners to work directly with the IRS to enter into closing
agreements as part of the partnership audit. Although the IRS may,
pursuant to Sec. 301.6223-2(d)(1), allow a person that is not the
partnership representative to participate in the examination of the
partnership, the IRS is not required to do so. The centralized
partnership audit regime is designed to provide for a single, unified
proceeding in which the IRS works solely with the partnership
representative who has the sole authority to bind the partnership and
all its partners. Developing a regulatory procedure that would allow a
single partner to work directly with the IRS, without working in
conjunction with the partnership representative, during the partnership
examination would contravene the regime's central design. The
partnership representative may request that the IRS work directly with
a partner on a closing agreement or other issues, but it is solely
within the IRS's discretion to allow that. See Sec. 301.6223-2(d)(1).
Accordingly, this comment was not adopted.
ix. Requests for Additional Modifications
Section 6225(c)(6) provides that the ``Secretary may by regulations
or guidance provide for additional procedures to modify imputed
underpayment amounts on the basis of such other factors as the
Secretary determines are necessary or appropriate'' for the purposes of
section 6225(c). Proposed Sec. 301.6225-2(d)(10) provided that a
partnership may request a modification not otherwise described in Sec.
301.6225-2(d), and the IRS will determine whether such modification is
accurate and appropriate. 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.
Several comments recommended that the Treasury Department and the
IRS exercise the authority under section 6225(c)(6) to expand the
available types of modifications under proposed Sec. 301.6225-2(d).
One comment recommended additional modifications related to foreign
partners, including a tax exemption based on section 892 and a
reduction in taxes based on eligibility for reduced rates of
withholding under a tax treaty. The comment further recommended that
these types of modifications and modification for a tax exemption based
on foreign status be verified using an expanded version of the existing
Forms W-8 and W-9.
Former proposed Sec. 301.6225-2(d)(3) provided rules regarding
modifications with respect to adjustments allocable to partners that
would not owe tax as a result of their status as a tax-exempt entity.
Proposed Sec. 301.6225-2(d)(3)(ii) defined tax-exempt entity to mean a
person or entity defined in section 168(h)(2)(A), (C), or (D). A
foreign person or entity as defined in section 168(h)(2)(C) includes a
foreign government or foreign organization. Accordingly, to the extent
an adjustment is allocable to a foreign government or foreign
organization, the partnership may request modification with respect to
such adjustment provided the requirements of Sec. 301.6225-2(c) and
(d)(3) are met.
Proposed Sec. 301.6225-2(d)(9), added in the August 2018 NPRM,
provided rules for tax treaty modifications. Under proposed Sec.
301.6225-2(d)(9), a partnership may request modification with respect
to a relevant partner's distributive share of an adjustment to a
partnership-related item if the relevant partner 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, would have derived the
item (within the meaning of Sec. 1.894-1(d)) had it been taken into
account properly in the partnership's reviewed year return, and 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 of the modification request.
No comments were received on the tax treaty modification rules
proposed in the August 2018 NPRM. Proposed Sec. 301.6225-2(d)(9) is
retained and simplified in the final regulations, with no change in
substance. Accordingly, a treaty modification is only available to the
extent the relevant partner would have qualified for the treaty benefit
at issue, whether a rate reduction or exemption from tax, had the item
been taken into account by the partner in the reviewed year. In
general, that means a foreign partner may submit a treaty modification
only if the partner was, for the reviewed year, a treaty resident;
would have derived the item of income through the partnership, or tiers
of partnerships, if applicable, under the tax laws of its country of
residence; would have been the beneficial owner of the item of income
(not a nominee or conduit); would have satisfied the
[[Page 6502]]
limitation on benefits article under the treaty, if any; and met any
other specific requirement for claiming the benefit under the treaty,
such as a stock ownership threshold in the case of a claim for a
reduced rate of tax on U.S. source dividends.
The final regulations do not address, however, which form will be
used for tax treaty modification, or for any type of modification.
Prescribing the specific form used for a specific type of modification
in the regulations is generally not ideal for either taxpayers or the
IRS. The IRS may determine in the future a different form is more
appropriate or the form number or name may require revision. Having the
flexibility to prescribe the form without needing to change the
regulations saves government resources and allows for expedited
guidance to taxpayers.
Another comment expressed concern that the determination of the
imputed underpayment with respect to adjustments to CFTEs could result
in an overpayment of taxes by partners under the centralized
partnership audit regime to the extent that one or more partners would
be eligible to take an additional foreign tax credit (FTC) as a result
of any adjustments made following the conclusion of an audit. The
comment recommended that taxpayers should be permitted to claim FTCs
for which they are eligible, provided that the taxpayer can provide
sufficient evidence to the IRS when claiming the credit. This comment
was not adopted.
The modification procedures provide adequate opportunity for a
partner to take advantage of any new FTCs. For example, the partners
may use amended return modification or the alternative procedure to
take into account all adjustments that might affect specific partners,
including any new FTCs. Accordingly, no changes were made to the
regulations in response to this comment.
Two comments requested that the Treasury Department and the IRS use
the authority under section 6225(c)(6) to expand modification and to
authorize an ``Early Decision'' procedure for pushing out audit
adjustments in tiered structures in order to address the administrative
concerns of the IRS related to a tiered push out. This comment, which
was submitted prior to the amendments by the TTCA to section 6226(b)
and the August 2018 NPRM, was not adopted. Under the rule proposed in
the August 2018 NPRM, adjustments may be pushed out beyond the first
tier of partners. See proposed Sec. 301.6226-3(e) and section 4.C.iii.
of this preamble for further discussion of the tiered push out rules.
One comment suggested that, to the extent an adjustment amount and
the imputed underpayment with respect to that adjustment amount have
already been reported and tax paid, modifications should be permitted
with respect to the tax amount paid and not be limited only to taxes
paid in connection with an amended return. The comment offered two
examples which might result in an imputed underpayment being determined
on tax that had already been paid. The first example would occur if
partners file tax returns with inconsistent positions under section
6222 that reflect the income being adjusted in the examination. The
second example presented by the comment is the situation in which two
or more people may be deemed by the IRS to have formed a partnership
when they have individually reported the income being ascribed to the
deemed partnership. This comment was adopted. The final regulations
under Sec. 301.6225-2(d)(2)(ii) allow a partnership to satisfy the
requirements of amended return modification by demonstrating that a
partner previously took into account such partnership adjustments and
their effect on tax attributes for all relevant years and made any
necessary payments.
Similarly, one comment recommended that modification provide for an
alternative to closing agreements that would allow the partnership to
demonstrate that a partner's share of an adjustment was partially or
fully reversed and so the imputed underpayment should therefore be
reduced to give credit for taxes paid in a later year. For instance,
the partnership could demonstrate that a former partner would have paid
tax on capital gain on its partnership interest and that amount of gain
would have, economically included the amount of an adjustment. The
partnership would then, pursuant to this recommendation, be permitted
to demonstrate that the imputed underpayment should be reduced by a
refund in an intervening year.
The same comment also recommended that the final regulations adopt
an additional modification type that would allow the partnership to
demonstrate the impact of adjustments on one or more of its partners,
specifically with respect to interest expense and foreign taxes paid.
The comment recommended that the partnership be able to demonstrate
that the partner's reporting of these items was not as beneficial as
assumed in the calculation of the imputed underpayment.
These comments were received in response to the June 2017 NPRM. The
August 2018 NPRM provided rules relating to the alternative procedure
and also allowed for amended return modification without regard to
sections 6501 and 6511. These additions in the August 2018 NPRM allow
for the types of modifications the comment was recommending. For
example, under amended return modification as revised in the August
2018 NRPM, a partner files amended returns for the first affected year
and other years to the extent tax attributes in those years are
affected by taking the adjustments into account. Whether the partner
pays additional amounts, demonstrates that on net there is no tax due,
or is entitled to a net refund, provided the partner has otherwise
complied with the modification requirements, the imputed underpayment
will be adjusted to remove that partner's share of the adjustments if
the IRS approves the modification. Accordingly, the final regulations
do not adopt these comments because the final regulations provide other
methods for accomplishing the rules recommended by the comments.
One comment recommended that the final regulations expand
modification procedures to allow modification based on closing
agreements by and amongst the partnership and the relevant partners
entered into in the course of a proceeding with the Competent Authority
office, in particular to facilitate the implementation of any mutual
agreement by the IRS in a manner that is consistent with the purpose of
tax treaties to avoid double taxation. This modification might include
mutual agreement procedures but may also include requests for
assistance in the context of partner-level foreign tax credits and
protective claims. The comment also recommended that the final
regulations permit multiple closing agreements and provide procedures
for cooperation between the Competent Authority and partnership
examination teams. This comment was received in response to the June
2017 NPRM. The August 2018 NPRM provided for treaty modifications that
were not in the former proposed regulations, and the final regulations
maintain the added treaty modification procedure. The final regulations
do not adopt any new modifications that were not previously proposed in
the August 2018 NPRM, but maintain the modifications based on closing
agreements and treaties. Nothing in the regulations limits the closing
agreements in a way that would prevent
[[Page 6503]]
a closing agreement, or multiple closing agreements, entered into
during the Competent Authority process from being considered in the
modification process.
C. Defenses to Penalties
Proposed Sec. 301.6225-2(d)(2)(viii) provided that 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 Sec. 301.6225-
2(d)(2) and then filing a claim for refund in accordance with forms,
instructions and other guidance. One comment recommended allowing the
audited partnership to submit partner-level defenses for both direct
and indirect partners as part of the modification process. According to
the comment, a review by the IRS prior to requiring payment of the
proposed penalties would permit an early determination regarding the
validity of any partner-level defense and reduce economic and
administrative burdens on taxpayers. The comment suggested that because
penalties can represent a large dollar amount, the requirement that
taxpayers must provide advance payment of penalties, even in cases
where they have a valid penalty defense, can create a significant
economic burden on partners. This comment was not adopted.
Due to the limited time the IRS has to review modification
requests, the Treasury Department and IRS have determined that
reviewing penalty defenses for specific partners in addition to
reviewing the amounts taken into account on amended returns or in the
alternative procedure submissions is unadministrable in the time frame
allowed. The core aspect of the modification procedures is to exclude
partnership adjustments from the imputed underpayment calculation.
Whether a specific partner is then entitled to a refund of penalties
paid after taking the adjustments into account is best determined
outside the modification procedures and not subject to the time
constraints of section 6225(c)(7) and Sec. 301.6225-2(c). The final
regulations, therefore, maintain the requirement that a partner must
first pay any penalty due with the amended return filed during
modification and then afterward file a claim for refund of the penalty
in order to raise a partner-level defense. However, to address the
concerns raised by the comment, the final regulations under Sec.
301.6225-2(d)(2)(viii) give the IRS flexibility to develop through
future guidance alternative procedures for raising partner-level
defenses as the IRS gains more familiarity with the centralized
partnership audit regime.
D. Adjustments That Do Not Result in an Imputed Underpayment
Proposed Sec. 301.6225-3 addressed the treatment of adjustments
that do not result in an imputed underpayment. Proposed Sec. 301.6225-
3 provided that a net negative adjustment resulting from a reallocation
adjustment, which 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 and is allocated to adjustment year
partners who are also reviewed year partners with respect to whom the
amount was reallocated.
One comment expressed concerns with the application of proposed
Sec. 301.6225-3(b)(4) to publicly traded partnerships. According to
this comment, the public trading of units of publicly traded
partnerships depends on their fungibility, which requires that all
items affecting the partners' section 704(b) capital accounts be
allocated pro rata. The comment suggested that an allocation under
proposed Sec. 301.6225-3(b)(4) could force an adjustment year
allocation to less than all of the public unit holders, potentially
causing the units to be non-fungible. This comment was not adopted at
this time, but the final regulations provide that the IRS may provide
exceptions to the rule under Sec. 301.6225-3(b)(4) pursuant to forms,
instructions, and other guidance prescribed by the IRS. As the IRS
gains more experience with the centralized partnership audit regime,
the IRS may determine to create an exception through forms,
instructions, or other guidance if doing so would benefit taxpayers
while fulfilling the requirements of the statute and remaining
administrable for the IRS. Having the flexibility to create such an
exception through forms, instructions, and other guidance preserves
government resources and expedites the process for the IRS to address
taxpayer needs and for taxpayers to be aware of changes in IRS
procedures.
One comment recommended that the regulations provide examples
demonstrating the proper application of proposed Sec. 301.6225-
3(b)(4). The final regulations add two such examples under Sec.
301.6225-3(d). One example demonstrates the application of the rule
under Sec. 301.6225-3(b)(4) in the context of a recharacterization
adjustment the other example demonstrates application of the rule in
the context of a reallocation adjustment.
One comment recommended that the rules be clarified regarding
whether netting would be allowed with respect to adjustments that do
not result in an imputed underpayment in multi-year audits. The comment
asks about a particular example: If an audit of 2018 results in an
imputed underpayment in 2018 and an overpayment in 2019 in regard to
adjustment items, the proposed regulations would not permit those
amounts to be netted. As discussed in section 3.A. of this preamble,
partnership adjustments with respect to different reviewed years are
not netted. If a multi-reviewed-year audit that resulted in an imputed
underpayment with respect to one reviewed year and adjustments that do
not result in an imputed underpayment with respect to a different
reviewed year both had the same adjustment year, then the expense
associated with the imputed underpayment paid in the adjustment year is
taken into account by the partnership in the adjustment year and the
adjustments that do not result in an imputed underpayment would also be
taken into account on the adjustment year tax return. Expenses related
to payment of an imputed underpayment are nondeductible under section
6241(4). As a result, such items would be taken into account according
to subchapter K principles in the adjustment year and the extent to
which any items net on the partnership or partners' returns would
depend on the particular adjustments and the facts and circumstances of
the partnership and partners. Instead, the partnership may also take
advantage of modification procedures and the election under section
6226 to allow partnership adjustments to be taken into account directly
by the partners that may, depending on the facts and circumstances,
allow for different netting results at the partner level.
Lastly, Sec. 301.6225-3(b)(7) was added to provide that partners
that previously took into account an adjustment that does not result in
an imputed underpayment before a notice of administrative proceeding
was mailed by the IRS or before an administrative adjustment request
was filed by the partnership do not take into account a second time the
same adjustment that does not result in an imputed underpayment. This
rule addresses situations where a partner took a position inconsistent
with the partnership return as filed and as a result of that
inconsistent position previously took into account items that were
later determined by the IRS (or by the partnership in an AAR) to be
[[Page 6504]]
adjustments that do not result in an imputed underpayment, such as
additional losses or deductions. The rule is designed to ensure that
such partners do not take the same items into account again in the
adjustment year.
4. Election for Alternative to Payment of the Imputed Underpayment
Twenty-two comments were received concerning section 6226, the
election for an alternative to payment of the imputed underpayment.
This section of this Summary of Comments and Explanation of Revisions
addresses comments concerning the mechanics and effect of making an
election under proposed Sec. 301.6226-1; the statements furnished to
partners and filed with the IRS pursuant to proposed Sec. 301.6226-2;
and the rules regarding how adjustments are taken into account by
partners in accordance with proposed Sec. 301.6226-3. Comments
concerning basis and tax attribute rules under proposed Sec. 301.6226-
4 will be addressed in future guidance.
A. Mechanics and Effect of Making an Election Under Section 6226
The comments received regarding the mechanics and effect of making
an election under section 6226 cover six general topics: (1) The time
for making the election; (2) revocations of the election; (3) making
the election when there are multiple imputed underpayments or there is
no imputed underpayment; (4) notification by the IRS that an election
is invalid; (5) making the election and filing a petition for
readjustment under section 6234; and (6) whether the election should be
mandatory.
i. Time for Making the Election Under Section 6226
Under section 6226(a) and proposed Sec. 301.6226-1(c)(3), a
partnership may make an election under section 6226 (push out election)
within 45 days of the date on which the FPA is mailed by the IRS. This
45-day period cannot be extended, and once made, the election may only
be revoked with the consent of the IRS. See proposed Sec. 301.6226-
1(c)(1), (3).
Several comments recommended changes to the 45-day period under
proposed Sec. 301.6226-1(c)(3). Some comments suggested that the
partnership should not be required to make the push out election until
after there is a final determination of the partnership adjustments,
either as a result of a defaulted FPA or, if a petition is filed, a
final court decision. Other comments recommended that the regulations
permit, either automatically or upon request, an extension of the 45-
day period. These comments were not adopted.
The 45-day period for making an election under section 6226 is
established by statute. Pursuant to section 6226(a)(1), section 6225
shall not apply to an imputed underpayment if the partnership ``not
later than 45 days after the date of the notice of final partnership
adjustment'' elects the application of section 6226 with respect to
such imputed underpayment and furnishes statements to its partners for
the reviewed year under section 6226(a)(2). The partners must then take
into account the adjustments that resulted in that imputed
underpayment. Consistent with section 6226(a)(1), proposed Sec.
301.6226-1(c)(3) provided that an election under Sec. 301.6226-1 must
be filed within 45 days of the date the FPA is mailed by the IRS and
that the time for filing such an election may not be extended.
Nothing in section 6226 provides for an exception to the 45-day
period described in section 6226(a)(1), nor does section 6226 provide
that the 45-day period may be extended by the IRS. Accordingly,
comments suggesting that the regulations provide that a push out
election may be made later than 45 days after the date of the FPA,
whether as a general rule or as a result of an extension, were not
adopted.
ii. Revocations of Elections Under Section 6226
One comment suggested that, as an alternative to delaying or
extending the 45-day period for making the push out election, the
regulations should provide that the IRS will liberally grant
revocations of a push out election in certain circumstances, such as in
the case of a settlement of an imputed underpayment. Another comment
suggested that the regulations should provide that the IRS will approve
any request to revoke an election upon completion of the administrative
or judicial proceeding. These comments were not adopted.
Section 6226(a) provides that an election under section 6226, once
made, ``shall be revocable only with the consent of the Secretary.''
Consistent with section 6226(a), Sec. 301.6226-1(c)(1) provides that
an election under Sec. 301.6226-1 may only be revoked with the consent
of the IRS. The requirement that a revocation only be made with the
consent of the IRS is mandated by the statute and is critical to the
administration of the collection aspect of the push out regime. A push
out election relieves the partnership that made the election under
section 6226 (audited partnership) from the requirement to pay the
imputed underpayment to which the election relates and shifts the
collection of any chapter 1 tax resulting from the partnership
adjustment to the partners of the partnership. In light of the
collection nature of the push out regime, whether a revocation of a
push out election should be granted largely depends on the facts and
circumstances. For example, a revocation may benefit the IRS, the
partnership, and its partners in the case of an agreement by the
partnership to pay at the partnership level in lieu of pushing out the
adjustments to its partners. On the other hand, a revocation may
prejudice the IRS and the partners if, for example, the revocation is
granted after statements have already been furnished to the partners.
In that case, some partners may have already paid any resulting tax. If
the revocation is significantly delayed, some partners may be time-
barred from filing refund claims. In turn, any refund claim filed by a
partner would require additional processing by the IRS, which could
become administratively burdensome particularly in the case of tiered
structures. Also, the period to assess the imputed underpayment against
the partnership may have expired at the time of the revocation request.
Additionally, the audited partnership may no longer be collectible and,
if the IRS granted a revocation, the IRS would be required to engage in
unnecessary and costly additional collection procedures. Requiring
consent of the IRS before a revocation takes effect ensures flexibility
to appropriately address each circumstance and protects partners that
may have already received pushed out statements. Accordingly, comments
recommending liberal or automatic approvals of requests to revoke push
out elections were not adopted.
iii. Making the Election When There Are Multiple Imputed Underpayments
or When There Is No Imputed Underpayment
Under proposed Sec. 301.6226-1(a), if an FPA includes more than
one imputed underpayment (as described in proposed Sec. 301.6225-
1(g)), a partnership may make an election under Sec. 301.6226-1 with
respect to one or more of the imputed underpayments identified in the
FPA. One comment suggested that the regulations clarify whether there
are any requirements for, or limitations on, a partnership's ability to
make a push out election for different imputed underpayments. Neither
the proposed regulations nor the final
[[Page 6505]]
regulations under Sec. 301.6226-1(a) contain any restrictions or
limitations on a partnership's ability to make an election under
section 6226 for a particular imputed underpayment identified in an
FPA. For each imputed underpayment for which the partnership plans to
make a push out election, the partnership must satisfy the provisions
of Sec. Sec. 301.6226-1 and 301.6226-2, including the requirement
under Sec. 301.6226-1(c)(3)(ii)(D) that the election identify the
imputed underpayment to which the election relates. Because the
regulatory text does not suggest there are any restrictions on making a
push out election with respect to different imputed underpayments, the
comment seeking further clarification on this point was not adopted.
One comment suggested that a partnership should be allowed to make
an election under section 6226 for a taxable year for which there is no
imputed underpayment, but for which there is a tax effect favorable to
the partnership. The comment described an example in which the IRS
determines in an examination of year 1 that the partnership should have
reported income originally reported in year 3 ratably over years 1, 2,
and 3. In the example, the IRS determines an imputed underpayment with
respect to year 1, and the partnership makes a push out election with
respect to that imputed underpayment. The comment suggested that a push
out election should be permitted for year 3 as well to correct the
perceived anomalous result that could occur if the reviewed year
partners did not get the benefit of the decrease in income with respect
to year 3.
Pursuant to section 6226(a)(1), the partnership may make a push out
election ``with respect to an imputed underpayment.'' Section 301.6226-
1(a) echoes the statutory language by providing that a partnership may
elect under Sec. 301.6226-1 an alternative to the payment by the
partnership of ``an imputed underpayment.'' Accordingly, to make a push
out election under section 6226(a)(1) and Sec. 301.6226-1, there must
be at least one imputed underpayment for the taxable year. To the
extent the comment was suggesting an election should be permitted for a
year in which there is no imputed underpayment, the comment was not
adopted.
As the comment observed, the partnership has other options to make
adjustments for year 3. The partnership in the example could file an
AAR for year 3, provided the period described in section 6227(c)
permitted the filing of an AAR for year 3. See 6227(c) and Sec.
301.6227-1(b). The modification procedures may also provide a mechanism
for the partnership and its partners to benefit from the change to year
3. For example, the partners may file amended returns (or utilize the
alternative procedure to filing amending returns) to take into account
the adjustments to years 1, 2, and 3. See Sec. 301.6225-2(d)(2). See
also section 6225(c)(9) (allowing modification of adjustments that do
not result in an imputed underpayment). Additionally, nothing in the
final regulations prevents the partnership from seeking a closing
agreement with the IRS with respect to year 3 subject to rules
generally applicable to closing agreements.
iv. Notification That an Election Under Section 6226 Is Invalid
Under proposed Sec. 301.6226-1(c)(1), an election under Sec.
301.6226-1 is valid until the IRS determines that the election is
invalid. If an election is determined by the IRS to be invalid, the IRS
will notify the partnership and the partnership representative within
30 days of such determination and provide the reasons for the
determination. See Sec. 301.6226-1(d). Former proposed Sec. 301.6226-
1(c)(2) had provided that if the IRS makes a final determination that
an election under Sec. 301.6226-1 is invalid, section 6225 applies
with respect to the imputed underpayment as if the election were never
made and the partnership must pay the imputed underpayment. The word
``final'' was removed from former proposed Sec. 301.6226-1(c)(2) in
the August 2018 NPRM to clarify 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. This
clarification was adopted in the final regulations under Sec.
301.6226-1(d) (formerly proposed Sec. 301.6226-1(c)(2)). Under Sec.
301.6226-1(d), the IRS may determine an election is invalid without
first notifying the partnership or providing the partnership an
opportunity to correct any failures to satisfy all of the provisions of
Sec. 301.6226-1 and Sec. 301.6226-2, including an opportunity to
correct errors in pursuant to Sec. 301.6226-2(d).
One comment suggested that the regulations require the IRS to
notify the partnership of its intent to determine that a push out
election is invalid and provide the partnership with an opportunity to
respond prior to making a final determination that the election is
invalid. This comment was not adopted.
An election under section 6226 may be invalid for a number of
reasons and not every case will present a need to first communicate
with the partnership. For example, the partnership may make an
election, but never furnish statements to its partners. Providing the
partnership with a preliminary determination that the election is
invalid in that case and an additional opportunity to furnish
statements would undermine the 60-day period for furnishing statements
(see proposed Sec. 301.6226-2(b)), which is designed to support the
IRS's timely collection of any additional reporting year tax and
provide timely information to reviewed year partners regarding any
additional reporting year tax. In such a case, the IRS should have the
ability to determine the election is invalid and to immediately assess
an imputed underpayment without first notifying the partnership.
Accordingly, the comment's suggestion was not adopted. However, while
nothing in the regulations requires the IRS to first contact a
partnership prior to making a determination that an election under
section 6226 is invalid, the IRS intends to develop procedures under
which the IRS will first contact partnerships prior to determining a
push out election is invalid in certain cases. Those procedures, if
adopted, will be set forth in future sub-regulatory guidance.
The same comment also suggested that the partnership should be able
to seek review of a decision by the IRS that a push out election is
invalid in the United States Tax Court. The United States Tax Court is
a court of limited jurisdiction. See section 7442. The Treasury
Department and the IRS do not have authority to confer jurisdiction on
the United States Tax Court. Therefore, this comment was not adopted.
v. Effect of Filing a Petition for Readjustment Under Section 6226
Under proposed Sec. 301.6226-1(e) (Sec. 301.6226-1(f) in the
final regulations), a partnership that has made an election under Sec.
301.6226-1 is not precluded from filing a petition under section
6234(a). Section 6234(a) provides that a partnership may file a
petition in the Tax Court, a United States district court, or the Court
of Federal Claims, within 90 days of the date on which an FPA is mailed
under section 6231. A petition under section 6234 may be filed in a
district court or the Court of Federal Claims only if the partnership
filing the petition makes a jurisdictional deposit in accordance with
section 6234(b). Proposed Sec. 301.6234-1(b) provide that the
jurisdictional deposit is the amount of (as of the date of the filing
of the
[[Page 6506]]
petition) any imputed underpayment (as shown on the FPA) and any
penalties, additions to tax, and additional amounts with respect to
such imputed underpayment.
One comment stated that the proposed regulations provide no
explanation as to how or whether the deposit amount under section
6234(b) may or should be adjusted to reflect a push out election under
section 6226. The comment recommended the regulations should provide a
mechanism that would enable a partnership to file a petition in a
district court or Court of Federal Claims and still make an election
under section 6226, without creating the risk of having tax on the
partnership adjustments paid twice. The comment suggested that one
possible approach might be to reduce the deposit amount by the amount
that would be reported by partners that receive push out statements.
The comment suggested that another possible approach might be to ensure
that there is a clear mechanism for the partnership to obtain a refund
of the jurisdictional deposit before any amounts are paid under the
push out by partners.
Nothing in the proposed regulations limits a partnership's ability
to file a petition in a district court or the Court of Federal Claims
if the partnership has made an election under section 6226 (provided
the partnership has made the jurisdictional deposit required by section
6234(b)). Proposed Sec. 301.6226-1(e) expressly provided that a
partnership making the election under Sec. 301.6226-1 is not precluded
from filing a petition under section 6234(a) (which includes petitions
in the Tax Court as well as petitions in district courts and the Court
of Federal Claims). Accordingly, to the extent the comment was seeking
clarification that a partnership can both make an election under
section 6226 and file a petition under section 6234, the comment was
not adopted because the plain language of Sec. 301.6226-1(f) (proposed
at Sec. 301.6226-1(e) and renumbered to Sec. 301.6226-1(f)) makes
clear that a partnership can take both actions. Accordingly, no changes
were made to proposed Sec. 301.6226-1 in response to the comment. To
the extent the comment was seeking to make clear that a partnership
that makes a valid election under section 6226 with respect to an
imputed underpayment is no longer liable for that imputed underpayment,
the plain language of section 6226(a) and Sec. 301.6226-1(b)(2) makes
clear that is the case. The comment's suggestion regarding the amount
of the jurisdictional deposit under section 6234(b) and proposed Sec.
301.6234-1(b) is addressed in section 9 of this Summary of Comments and
Explanation of Revisions.
vi. Elective Nature of Section 6226
One comment suggested that the regulations should make the election
under section 6226 mandatory, unless provided for otherwise in the
partnership agreement, in two circumstances in order to mitigate a
partnership representative's potential conflict of interest and to
provide protection to partners that are partners in the adjustment year
but not partners in the reviewed year. The first circumstance is when
the partnership representative is both a partner in the reviewed year
and the adjustment year, and the partnership representative's interest
during the adjustment year is less than it was in the reviewed year.
The second circumstance is when the aggregate partnership interest of
any adjustment year partner or group of partners holding a 20 percent
or greater interest in the partnership is 20 percent or greater than
the interest held by the same partner or group of partners in the
reviewed year. Because the approach recommended by the comment is
prohibited by statute, the comment's recommendation was not adopted.
Sections 6225 and 6226 provide that the default rule, absent an
affirmative election by the partnership, is that the partnership shall
pay any imputed underpayment resulting from the partnership
adjustments. The regulations cannot switch the default rule from one
that imposes partnership liability under section 6225 to one that
requires a push out election under section 6226. Additionally, a
partnership ``elects the application of'' section 6226 with respect to
an imputed underpayment. Section 6226(a)(1). That election is statutory
and, like under any other election under the Code, is a choice by the
partnership. It would not be consistent with the elective nature of
section 6226 to require the partnership to make a push out election
under any circumstance.
vii. Election Must Include Address for Each Reviewed Year Partner
Proposed Sec. 301.6226-1(c) required that an election under Sec.
301.6226-1 must include each reviewed year partner's name, address, and
TIN. Under Sec. 301.6226-2(e), each statement furnished by the
partnership to a reviewed year partner must include ``the current or
last address of the reviewed year partner that is known to the
partnership.'' A partnership should use the same standard for
determining the address included for each reviewed year partner in the
election under Sec. 301.6226-1 as the address included in each
statement under Sec. 301.6226-2. Accordingly, the final regulations
under Sec. 301.6226-1(c) clarify that an election under Sec.
301.6226-1 must include the ``the current or last address of each
reviewed year partner that is known to the partnership.''
B. Statements Furnished to Partners and Filed With the IRS
The comments received regarding furnishing statements to partners
and filing the statements with the IRS cover five general areas: (1)
The partners to whom the statements are furnished; (2) the timing of
when the statements are furnished; (3) reasonable diligence in
identifying correct addresses; (4) the effect of failing to properly
furnish statements; and (5) the content of the statements.
i. Partners to Whom the Statements Are Furnished
Section 6226(a)(2) requires a partnership to furnish statements to
``each partner of the partnership for the reviewed year.'' Consistent
with the statute, proposed Sec. 301.6226-2(a) provided that a
partnership that makes an election under Sec. 301.6226-1 must furnish
to each reviewed year partner a statement reflecting the partner's
share of partnership adjustments associated with the imputed
underpayment for which the election under Sec. 301.6226-1 was made. A
``reviewed year partner'' is any person who held an interest in the
partnership at any time during the reviewed year. See proposed Sec.
301.6241-1(a)(9). One comment suggested that the partnership should
only be required to furnish (or have the option to furnish) statements
to partners that would owe additional tax as a result of the
partnership adjustments. This comment was not adopted.
The statute does not impose any qualifications or limitations on
which partners from the reviewed year must be furnished push out
statements. The statute mandates that the partnership furnish a
statement ``to each partner of the partnership for the reviewed year.''
Section 6226(a)(2). This statutory requirement is unambiguous and as a
result is not being altered in the final regulations.
In addition, the collection mechanism of section 6226 is similar to
tax reporting with respect to Schedules K-1, in that the partnership
furnishes statements to the partners, and the partners are solely
responsible for determining and self-reporting any tax due.
Additionally, in most cases, the
[[Page 6507]]
partnership will not know whether a reviewed year partner will owe
additional tax for a particular year as a result of a push out
election. Therefore, the partnership could not properly furnish
statements without obtaining additional information about each
partner's tax situation and determining to a high degree of certainty
whether the information provided was accurate. Such an exercise would
be burdensome for the partnership, potentially invasive to partners,
and pose significant tax administration concerns. Furthermore, such a
rule would require the IRS to know which partners would ultimately owe
tax as a result of the election to evaluate whether the partnership
properly furnished statements. While a partnership may know it is
likely that a particular partner will owe additional tax under certain
circumstances, crafting a general rule with those partnerships and
circumstances in mind would be unfair to partnerships that lack such
knowledge or have a means of obtaining it. In contrast, a rule
requiring the partnership to furnish a statement to each reviewed year
partner, regardless of whether that partner might owe tax as a result
of the pushed out adjustments, is more administrable for the IRS, less
burdensome to partnerships, and required by the statute.
The same comment also recommended that the regulations clarify how
adjustments are communicated to reviewed year partners who dispose of
their interest in the partnership, including persons who were partners
in the reviewed year but not the adjustment year and persons who were
only partners in the intervening years (the years after the reviewed
year but before the adjustment year). Persons who were only partners in
the intervening years are by definition not reviewed year partners, and
therefore the partnership is not required to furnish statements to such
partners under Sec. 301.6226-2. As a result, partners that were only
partners during intervening years are not required to take into account
partnership adjustments under Sec. 301.6226-3. Therefore, to the
extent the comment was suggesting statements should be furnished to
partners from intervening years only, this suggestion was not adopted.
Persons who were reviewed year partners, but who are not partners
during the adjustment year or some or all of the intervening years,
retain their status as reviewed year partners regardless of when they
disposed of their interest. The partnership is required to furnish
statements to its reviewed year partners in accordance with Sec.
301.6226-2. Because the proposed regulations clearly required that
statements be furnished to all reviewed year partners, no changes were
made in response to this comment.
ii. Timing of When the Statements Are Furnished
Two comments were received regarding the timing of the statements
furnished by a partnership to its reviewed year partners. The first
comment suggested that the regulations should provide that a
partnership will not be required to furnish statements under proposed
Sec. 301.6226-2 until after the partnership has exhausted its rights
to challenge the audit adjustments through an administrative or
judicial proceeding.
Under proposed Sec. 301.6226-2(b)(1), a partnership that makes an
election under Sec. 301.6226-1 must furnish statements to its reviewed
year partners (and file those statements with the IRS) no later than 60
days after the date all of the partnership adjustments to which the
statement relates are finally determined. Partnership adjustments
become finally determined upon the later of the expiration of the time
to file a petition under section 6234 or, if a petition under section
6234 is filed, the date when the court's decision becomes final.
Proposed Sec. 301.6226-2(b)(1)(i), (ii). Once the time to file a
petition has expired, or if a petition is filed, the court's decision
has become final, the partnership has exhausted its ability to
challenge the partnership adjustments through administrative and
judicial avenues. Accordingly, because the plain language of proposed
Sec. 301.6226-2(b)(1) reflected the rule suggested by this comment, no
changes were made in response to this comment.
The second comment suggested that the due date for the statements
under proposed Sec. 301.6226-2 should align with the due date for the
partnership's Schedule K-1s and that extensions of the statement due
date should be permitted to accommodate the complexity of the
calculations necessary for the accurate distribution of the adjustments
among the partners. The comment stated that not having the statement
due date coincide with the Schedule K-1 due date would create confusion
among the partners and likely result in less timely compliance. This
comment was not adopted.
Under section 6226(a) and (b), each reviewed year partner that is
furnished a statement takes into account the partnership adjustments
reflected on that statement by adjusting the partner's chapter 1 tax
for the taxable year which includes the date the statement was
furnished by the partnership (the reporting year). Therefore, the date
the statement is furnished by the audited partnership determines which
taxable year a partner (either direct or indirect) will pay tax as a
result of taking into account the partnership adjustments (the
additional reporting year tax). For example, if a reviewed year partner
is furnished a push out statement on March 15, 2022 with respect to
reviewed year 2020, the partner must report and pay its additional
reporting year tax on the partner's return for the 2022 taxable year,
which, for individuals, would be considered timely filed on April 17,
2023 (April 15, 2023 is a Saturday). In contrast, when a partner
receives a Schedule K-1, the partner is required to report the items on
that Schedule K-1 on the tax return for the taxable year that has just
ended. For example, if a partner receives a Schedule K-1 on March 15,
2022 for the 2021 taxable year, the partner must report the items on
that Schedule K-1 on the partner's return for the 2021 taxable year,
which, for individuals, would be due on April 15, 2022.
These examples illustrate the impediments to aligning the push out
statement due date with the Schedule K-1 due date or with providing
extensions of the statement due date. First, reviewed year partners who
simultaneously receive both a push out statement and a Schedule K-1 may
be required to report the items on those statements in different
taxable years. While the receipt of tax documents at the same time of
year might have some superficial appeal, there is a risk of causing
confusion about when and how to take into account the information on
those documents. For instance, receiving the push out statement at the
same time as the Schedule K-1 could result in a belief by the partner
that the partner is supposed to report the amounts on the push out
statement in the same year as the items on the Schedule K-1, which
would likely be incorrect. In addition, the reviewed year partners, to
whom the push out statements must be furnished, may not be the same as
the partners for whom Schedule K-1s are required. Therefore, requiring
the statements to be furnished at or around the same time may also
create confusion for the partnership.
Second, aligning the push out statement due date with the Schedule
K-1 due date or allowing extensions would significantly delay the
reporting and payment of the additional reporting year tax by reviewed
year partners, which is contrary to the interests of sound tax
administration. A delay in the
[[Page 6508]]
reporting and payment of the additional reporting year tax would also
increase the amount of interest partners would be liable for under
section 6226(c). For example, if a reviewed year partner is furnished a
push out statement on March 15, 2022 with respect to reviewed year 2020
under proposed Sec. 301.6226-2 that statement reflects adjustments
that were finally determined on or after January 15, 2022 (within the
past 60 days). However, if instead the regulations provided that a
statement may be furnished by the Schedule K-1 due date for the year in
which the adjustments become finally determined (2022), the push out
statement would not need to be furnished until March 15, 2023 (assuming
no extensions). Under such a rule, the reviewed year partner would not
be required to pay the additional reporting year tax until April 15,
2024, a full year after the partner would pay under the proposed
regulations. See Sec. 301.6226-3(b).
Accordingly, it is in the interests of sound tax administration to
require the push out statements to be furnished expeditiously for all
adjustments that are finally determined more than 60 days from the end
of the calendar year because the additional reporting year tax is
required to be paid with the return for the year in which the statement
is furnished. This reporting and payment system also benefits partners
by ensuring that reviewed year partners are furnished the push out
statement close in time to the final determination of the partnership
adjustments, allowing the reviewed year partners to determine any
additional reporting year tax, effects on tax attributes, and make
payments to stop interest from continuing to run.
For these reasons, the comment recommending alignment of the push
out statement due date with the Schedule K-1 due date was not adopted.
The recommendation that the push out statement due date be subject to
extension also was not adopted for the reasons described in this
section of this preamble.
In the case of a tiered structure, however, the comments'
recommendation to align the push out statement due date with the
Schedule K-1 due date is reflected in Sec. 301.6226-3(e). Under Sec.
301.6226-3(e)(3)(ii), pass-through partners must furnish statements to
their affected partners no later than the extended due date for the
return for the adjustment year of the audited partnership. This due
date aligns the push out statements furnished by pass-through partners
with the extended Schedule K-1 due date for the audited partnership,
accommodating, in part, the comment's recommendation.
iii. Reasonable Diligence in Identifying Correct Address of Reviewed
Year Partner
Under proposed Sec. 301.6226-2(b)(2), a partnership must furnish
statements to each reviewed year partner in accordance with the forms,
instructions, and other guidance prescribed by the IRS. If the
partnership mails the statement, the partnership 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 as
undeliverable, the partnership must undertake reasonable diligence to
identify a correct address for the reviewed year partner to which the
statement relates. Proposed Sec. 301.6226-2(b)(2).
One comment suggested the final regulations clarify that a master
limited partnership (a publicly traded partnership as defined in
section 7704) satisfies the reasonable diligence requirement under
proposed Sec. 301.6226-2(b) if the partnership utilizes the same
procedures it uses for undeliverable Schedule K-1s. According to the
comment, a master limited partnership (MLP) normally sends the Schedule
K-1 to the address provided to the MLP by the partner's broker; MLPs
provide call centers and web-based support that allow partners to
directly provide updated contact information to the partnership; and
MLPs typically do not attempt to update partners' addresses by using
public name and address databases, but will update an address if mail
is returned with a forwarding address.
The regulations under the centralized partnership regime are rules
of general applicability for all partnerships. The procedure suggested
by the comment would be cost-prohibitive for many partnerships. The
Treasury Department and the IRS decline to provide a safe harbor in the
final regulations solely for partnerships with the means to operate a
call center. Additionally, it is not administrable to create special
rules for different categories of partnerships as this would result in
a multitude of special rules that in some cases may be contradictory
and under inclusive. It may also create additional burdens for
partnerships that cannot comply with a general rule designed with only
a specific type of partnership in mind.
As the IRS gains experience with the centralized partnership audit
regime and the push out election in particular, the Treasury Department
and the IRS may consider whether further guidance regarding reasonable
diligence would be beneficial for partnerships. For purposes of the
final regulations, however, the comment's suggestion was not adopted,
and the final regulations maintain the rule that the partnership
undertake reasonable diligence when a statement is returned
undeliverable.
In addition, the final regulations under Sec. 301.6226-2(b)(2)
clarify that if after undertaking reasonable diligence the partnership
identifies a correct address for the reviewed year partner, the
partnership must mail the statement to the reviewed year partner at
that correct address.
iv. Effect of Failing To Properly Furnish Statements
Several comments suggested that the regulations clarify the effect
of a partnership's failure to properly furnish statements under Sec.
301.6226-2 has on the validity of an election under section 6226. One
comment recommended clarification of whether a failure to undertake
reasonable diligence under proposed Sec. 301.6226-2(b)(2) with respect
to a single partner would make the entire election under section 6226
invalid or only the portion allocable to that specific partner.
Similarly, another comment recommended that the regulations clarify
that a failure to furnish the statement to one partner would mean the
push out election was still effective with respect to the other
reviewed year partners, but that the partnership would be liable for
the tax attributable to the partner who was not properly furnished a
statement.
Pursuant to section 6226(a)(1), an election under section 6226 is
made ``with respect to an imputed underpayment.'' Section 6226(a)(2)
requires a partnership to furnish statements to ``each partner'' of the
partnership for the reviewed year. Accordingly, the IRS may invalidate
an election under section 6226(a) for any failure to meet the
requirements of Sec. 301.6226-1, regarding how an election must be
made, or Sec. 301.6226-2, regarding the manner in which statements
must be furnished. Because an election under section 6226(a) is ``with
respect to an imputed underpayment'' and not with respect to each
specific partnership adjustment that resulted in that imputed
underpayment, an election under section 6226 is either valid or invalid
with respect to the entire imputed underpayment for which the election
was purportedly made.
Nothing in the regulations, however, requires the IRS to determine
that a purported election under section 6226 is invalid in situations
where the partnership fails to fully comply with
[[Page 6509]]
Sec. 301.6226-1 or Sec. 301.6226-2. To the contrary, pursuant to
Sec. 301.6226-1(c)(1), a push out election is valid unless and until
the IRS determines that the election is invalid. Accordingly, if a
partnership makes an election under Sec. 301.6226-1 and furnishes
statements to 99 out of 100 reviewed year partners, the partnership's
push out election is valid unless and until the IRS determines the
election is invalid.
Several comments suggested that the regulations provide a safe
harbor that would satisfy the requirement to furnish statements to all
reviewed year partners. Two comments suggested that the regulations
adopt a de minimis rule providing that a failure to deliver a certain
number of push out statements, or statements representing a de minimis
amount of the pushed out adjustments, would not invalidate a
partnership's election under section 6226. One comment recommended that
the regulations provide that a partnership's push out election will not
be invalidated if the partnership has substantially complied with the
regulatory requirements. Another comment suggested that the regulations
provide that a partnership will be deemed to have made a valid election
under section 6226 if the partnership makes a good faith effort to
furnish push out statements to all of its partners. Another comment
recommended that the regulations clarify that the obligation to furnish
a statement to each reviewed year partner is deemed satisfied if the
partnership in good faith furnishes a statement to each partner to whom
it was required to send a Schedule K-1 for the reviewed year. These
comments were not adopted.
As an initial matter, proposed Sec. 301.6226-2 did not require
that the statements be delivered in order for the partnership's
election under section 6226 to be valid. Rather, proposed Sec.
301.6226-2(b)(2) required the partnership to furnish statements to
partners in accordance with forms, instructions, and other guidance;
mail the statements to the current or last address of the partner that
is known to the partnership, and undertake reasonable diligence to
identify a correct address for any returned statement. Compliance with
the regulations does not require actual delivery, which is illustrated
by proposed Sec. 301.6226-2(b)(3), Example 1.
With respect to the suggestion that the regulations adopt a de
minimis, substantial compliance, or good faith rule for failure to
properly furnish statements to partners, these suggestions were not
adopted. The push out regime is a collection mechanism in lieu of
collecting the imputed underpayment from the audited partnership. The
benefit to the audited partnership by making a push out election is
that the partnership is no longer liable for the imputed underpayment
to which the election relates. One of the requirements to obtain this
benefit is that the partnership must furnish correct statements to all
of the partnership's reviewed year partners. Until the statements have
been furnished and the partners determine their additional reporting
year tax, the tax implications for each partner as a result of taking
into account the pushed out adjustments is uncertain. The additional
reporting year tax for each partner may differ greatly, ranging from an
increase in tax, a decrease in tax, or no liability at all.
None of the rules suggested by the comments--de minimis safe
harbor, substantial compliance, good faith standard--takes into account
the asymmetric tax consequences of the pushed out adjustments in the
hands of the partners. For instance, a large percentage of adjustments
may be allocated to one or a few partners and a failure to furnish
statements to this de minimis number of partners would impede the
proper collection of a large percentage of additional reporting year
tax. Similarly, relatively small numerical adjustments may have
significant tax effects on partners. A de minimis rule, whether based
on the number of statements or amount of adjustments, would frustrate
the collection aspect of section 6226. Additionally, a de minimis rule
would present tax administration challenges because a partnership can
pick and choose which statements to furnish to which partners, so long
as the number of statements furnished or the amount of the pushed out
adjustments fell within the de minimis amount. Good faith and
substantial compliance rules present the same concerns.
Other provisions in the regulations mitigate against the concerns
expressed by the comments. As previously discussed in this section of
this preamble, under Sec. 301.6226-2(b)(2) a partnership must send a
push out statement to the current or last address of the partner that
is known to the partnership. Doing so is generally sufficient for
purposes of satisfying the address requirements of Sec. 301.6226-2.
Additionally, the general versus specific imputed underpayment rules
also mitigate concerns about being unable to properly furnish a
statement to a particular partner or group of partners. The partnership
may request that the IRS designate a specific imputed underpayment with
respect to the adjustments allocable to a partner or group of partners
if the partnership has concerns about furnishing a statement to that
partner or group of partners. See proposed Sec. 301.6225-2(d)(6). For
example, if the partnership lacks current address information for a
specific partner, the partnership may request a specific imputed
underpayment for that partner's share of the adjustments, pay the
specific imputed underpayment, and make a push out election for the
general imputed underpayment.
Two comments expressed concerns about situations when the partner
no longer exists or is deceased or when the partnership does not have
current contact information for a former partner. One of these comments
suggested that once a partnership has furnished statements to its
partners and to the IRS, the partnership has fulfilled its obligations
under section 6226. The other comment specifically stated that neither
the partnership nor the remaining partners should have any liability
for the imputed underpayment or associated interest and penalties with
respect to adjustments allocable to partners that are no longer in
existence or who are deceased.
Nothing in the statute or the proposed regulations provides that
the partnership or any remaining partners are liable for any amounts
that are allocable to reviewed year partners who are no longer in
existence or are deceased. Under section 6226(a) and proposed Sec.
301.6226-1, there are only two requirements for a partnership to make
an election under section 6226. One, the partnership must make an
election under section 6226(a)(1) and Sec. 301.6226-1 within 45 days
of the date the FPA is mailed by the IRS. Two, the partnership must
furnish statements to each partner from the reviewed year in the time
and manner prescribed by Sec. 301.6226-2. The plain language of
proposed Sec. 301.6226-1(c)(1) made clear that if a valid election is
made under Sec. 301.6226-1, the partnership is not liable for the
imputed underpayment to which the election applies. Additionally, under
proposed Sec. 301.6226-2(f), only a partner's allocable share of the
partnership adjustments are included on the statement furnished to that
reviewed year partner. Pursuant to Sec. 301.6226-3, only the
adjustments reflected on the statement furnished to the reviewed year
partner must be taken into account by that partner. To the extent the
comment expressed concern about the partnership lacking a current
address for a partner that no longer exists, is deceased or is
otherwise a former partner, the proposed regulations
[[Page 6510]]
provide that the partnership may furnish statements to the last address
known to the partnership. Only if the statements are returned as
undeliverable is the partnership required to undertake reasonable
diligence to ascertain a current address. Accordingly, no revisions to
the final regulations were made in response to this comment.
v. Corrections of Errors in Statements
As discussed in section 4.B.iv. of this preamble, several comments
expressed concerns about the requirement to furnish statements to all
of the partnership's reviewed year partners. Although those comments
were not adopted, the ability to correct errors in statements mitigates
the potential effects of this rule. Proposed Sec. 301.6226-2(e)
provided that the partnership must provide correct information in the
statements it furnishes to its partners and files with the IRS.
Proposed Sec. 301.6226-2(d)(2)(i) provided that if a partnership
discovers an error in a statement within 60 days of the statement due
date, the partnership must correct that error, and may do so without
IRS consent. If a partnership discovers an error more than 60 days
after the statement due date, the partnership may only correct the
error after receiving IRS consent. Proposed Sec. 301.6226-2(d)(2)(ii).
Additionally, when the IRS discovers an error in a statement, the IRS
may require the partnership to correct that error or to provide
additional information. Proposed Sec. 301.6226-2(d)(3).
The correction rules under proposed Sec. 301.6226-2(d) were
designed to require a partnership that identifies an error in a
statement to correct that error expeditiously. Similarly, nothing in
the regulations prevents a partner that receives a statement containing
an error from alerting the partnership of the error within the 60-day
period so that the audited partnership can correct the error. Even if
the partnership corrects errors within the 60-day period, however,
proposed Sec. 301.6226-1(c)(2) provided the IRS could invalidate the
election.
In light of the comments in section 4.B.iv of this preamble
regarding the effect on the push out election of failures to furnish
correct statements, the Treasury Department and the IRS have revised
the rule under proposed Sec. 301.6226-1(c)(2). The 60-day correction
period should serve as a period of time after the statements are
furnished to verify that the information on the statements was correct
and to rectify any errors without adverse consequences regarding the
push out election to the partnership or its partners. The ability to
correct statements gives the partnership an opportunity to ensure
statements were furnished properly and, to the extent a correction can
cure the identified defects, to take steps to ensure that an election
under section 6226 will not be invalidated. The ability to correct
errors also ensures that partners have the correct information when the
partners take into account the adjustments reflected on the statements.
Accordingly, the final regulations under Sec. 301.6226-1(d)
clarify that the IRS may not invalidate an election based on errors
that are timely corrected by the partnership in accordance with Sec.
301.6226-2(d). However, any errors in any statements furnished by the
partnership are subject to penalty under section 6722 and the
regulations thereunder. See Sec. 301.6226-2(a). In the case of errors
discovered by the IRS, 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. The IRS may,
instead, invalidate the election.
One comment recommended changes to the correction process under
Sec. 301.6226-2(d) and the timing of the correction period.
Specifically, the comment suggested with respect to errors discovered
by a partnership, the partnership should have an automatic obligation
and right to issue corrected statements for errors discovered no later
than 60 days after the extended due date of the audited partnership's
adjustment year return. The comment also suggested that for errors
discovered by the partnership after this date, the partnership must
notify the IRS, and unless the IRS objects within 90 days of such
notification, the partnership must issue the corrected statements. The
comment suggested that if the IRS issues a denial within the 90-day
period, such denial shall include an explanation for the denial, and
the partnership shall have the ability to challenge the decision with
IRS Appeals. These suggestions were not adopted.
It is not in the interest of sound tax administration to place a
limit on the time the IRS has to consider whether to allow corrected
statements after 60 days from the due date of the statements. For
example, a partnership may request to make a correction at a time when
the period of limitations on assessing additional tax for the affected
partners was closed, but the period of limitations for requesting a
refund as to other affected partners was still open. If the IRS was
unable to process the request to issue corrected statements within 90
days, the corrected statements would be furnished to the partners and
those partners would take into account the adjustments. If the IRS
determines that the correction of the errors was insufficient, the IRS
could determine the partnership's election under section 6226 was
invalid, but the period of limitations on assessing the imputed
underpayment may have expired by that time. By requiring IRS permission
before any corrected statements are furnished, the IRS can evaluate
each request based on the facts and circumstances and ensure that any
proposed corrections are consistent with the determinations made during
the partnership proceeding and would not frustrate the collection of
any amounts owed as a result of the partnership proceeding. Requiring
IRS permission also incentivizes partnerships to submit correct
statements by the due date, which ensures that partners are provided
timely and accurate information with which to take into account the
adjustments. Because partners may have already taken into account the
adjustments, any corrections received by the partners after they have
taken into account the adjustments could detrimentally affect those
partners.
The same comment also suggested that with respect to errors
discovered by the IRS, the IRS may not unreasonably refuse to permit a
partnership to issue corrected statements if correction of the error
results in a reduced tax liability by the affected partners or to
correct the allocation of an adjustment between partners. This comment
was not adopted. To extent this comment was suggesting that the
regulations require the IRS to require the partnership to correct
errors the IRS discovers in these circumstances, the comment was not
adopted. The IRS needs discretion to evaluate whether requiring the
correction of errors is in the interest of sound tax administration.
For example, the errors may be de minimis or the correction of the
errors may result in barred assessments or require partners to file
amended returns if they have already taken into account the
adjustments. To the extent the comment was suggesting that the IRS
should not unreasonably withhold consent in situations where the
partnership has discovered errors, the comment was also not adopted. As
stated earlier in this section of this preamble, the IRS needs the
flexibility to evaluate requested changes based on the facts and
circumstance of each request.
vi. Contents of the Statements
Under proposed Sec. 301.6226-2(e), each statement described in
proposed
[[Page 6511]]
Sec. 301.6226-2 must include an enumerated list of items, including
the partner's name and taxpayer identification number (TIN) and any
other information required by forms, instructions, and other guidance
prescribed by the IRS. Several comments suggested that the IRS assign a
unique control number or other numerical code to a notice of final
partnership adjustment and require that all push out statements with
respect to an imputed underpayment reflected on that FPA include that
control number. The IRS intends to adopt this suggestion by assigning a
unique control number to each examination under the centralized
partnership audit regime and by using that number for each form,
letter, or other document used in the examination as well as any forms
or statements utilized for a push out election. The final regulations,
however, do not include the audit control number as an enumerated item
under Sec. 301.6226-2(e). Requiring the control number through the
forms and instructions provides the IRS with the flexibility to gain
experience with the use of a unique control number and to make changes,
as necessary, without needing to amend the regulations. This
flexibility preserves government resources and also expedites the
process for taxpayers to be aware of changes in IRS procedures.
C. Adjustments Taken Into Account by Partners
The comments regarding how adjustments are taken into account by
partners covered five general areas: (1) The calculation of the
additional reporting year tax; (2) penalties, additions to tax, and
additional amounts; (3) pass-through partners; (4) qualified investment
entities and master limited partnerships (MLPs); and (5) the examples
under proposed Sec. 301.6226-3(h).
i. Calculation of the Additional Reporting Year Tax
Former proposed Sec. 301.6226-3(a) provided that the chapter 1 tax
for each reviewed year partner for the reporting year was increased by
the additional reporting year tax, which was generally defined as the
aggregate of the correction amounts determined under former proposed
Sec. 301.6226-3(b). Under former proposed Sec. 301.6226-3(b), the
aggregate of the correction amounts was determined by adding the amount
by which a reviewed year partner's chapter 1 tax would have increased
for the first affected year with the amount by which the partner's
chapter 1 tax for any intervening year would have increased if the
adjustments were taken into account in the first affected year. Because
the rule did not account for any decrease in a reviewed year partner's
tax for a taxable year, former proposed Sec. 301.6226-3(b)(1) provided
that a correction amount for any taxable year could not be less than
zero and that any amount less than zero could not reduce any other
correction amount.
Section 206(e) of the TTCA amended section 6226(b) to provide that,
when a reviewed year partner takes into account the adjustments under
section 6226(b), the partner's chapter 1 tax for the reporting year is
adjusted by the amounts the partner's chapter 1 tax for the first
affected year or any intervening year would increase or decrease if the
partner's share of the adjustments were taken into account in the first
affected year. The TTCA amendments to section 6226(b) were adopted in
the August 2018 NPRM. Proposed Sec. 301.6226-3(b), as revised in the
August 2018 NPRM, provided that each reviewed year partner's chapter 1
tax for the reporting year is increased or decreased by the additional
reporting year tax, as appropriate. Under proposed Sec. 301.6226-
3(b)(2) and (3), the correction amounts are the amounts by which the
partner's chapter 1 tax would increase or decrease if the partner's
taxable income for that year were recomputed by taking into account the
partner's share of the partnership adjustments. Under proposed Sec.
301.6226-3(b)(1), as revised, a correction amount for the first
affected year or any intervening year may be less than zero, and any
correction amount less than zero may reduce any other correction
amount.
The final regulations under Sec. 301.6226-3(b)(1) were further
revised to provide that nothing in Sec. 301.6226-3 entitles any
partner to a refund of tax imposed by chapter 1 to which such partner
is not entitled. This language clarifies that the rules under section
6226 and 6227 are consistent insofar as those rules concern the ability
of a partner to claim a refund of an overpayment when taking into
account partnership adjustments. See Sec. 301.6227-3(b)(1). Whether an
overpayment exists is determined by the Code and existing law outside
the scope of these regulations. See section 5.D. of this preamble for
further discussion.
Proposed Sec. 301.6226-3(b)(2) and (3) provided that when
computing a correction amount for the first affected year or any
intervening year, partners should account for the amount of tax 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.'' The final regulations under
Sec. 301.6226-3(b)(2) and (3) remove the language referring to the
alternative procedure for filing amended returns under section
6225(c)(2). Amounts assessed based on submissions under the alternative
procedure more appropriately fall within the amounts described in Sec.
301.6226-3(b)(2)(ii)(B) and (b)(3)(ii)(B). Accordingly, treating such
amounts as akin to amounts shown on amended returns could have led to
inaccurate correction amounts. As such, the final regulations under
Sec. 301.6226-3(b)(2)(ii)(B) and (b)(3)(ii)(B) have been revised to
clarify that the amounts under those provisions include not only the
amounts described in Sec. 1.6664-2(d), but also any amounts not
included on the return of a partner which are assessed against and
collected from the partners. Such amounts include amounts paid as part
of modification under Sec. 301.6225-2, including under the alternative
procedure or in accordance with a closing agreement. Such amounts do
not include, however, any amounts paid with an amended return filed as
part of modification because those amounts are included with the
amounts shown on a return or amended return under Sec. 301.6226-
3(b)(2)(ii)(A) and (b)(3)(ii)(A).
Several comments received prior to the TTCA amendments recommended
that the calculation of the additional reporting year tax under former
proposed Sec. 301.6226-3(b) be revised to account for potential
decreases to a reviewed year partner's chapter 1 tax had the
adjustments been taken into account. Certain comments stressed that it
was critical for taxpayers to receive symmetrical treatment under
section 6226 with respect to adjustments for overpayments or other
adjustments that would serve to reduce the additional reporting year
tax. One comment suggested that a decrease in tax in one year as a
result of the adjustments should be able to reduce the additional tax
payable with respect to any other taxable year. One comment
specifically recommended that former proposed Sec. 301.6226-3(b) be
revised to provide that the correction amount for a partner is the
amount by which the reviewed year partner's chapter 1 tax would
increase or decrease for the first affected year and all intervening
years.
The plain language of section 6226(b), as amended by the TTCA, and
proposed Sec. 301.6226-3(a) and (b), as revised in the August 2018
NPRM, make clear that any decreases in tax that result from taking into
account the adjustments can produce a correction amount, and in
[[Page 6512]]
turn an additional reporting year tax, that is less than zero.
Accordingly, because the recommendations made by the comments were
reflected in the proposed regulations, no changes were necessary in
response to those comments.
Another comment recommended that the regulations clarify how
information would be communicated to reviewed year partners to
calculate a correction amount under section 6226(b)(2)(B) for an
intervening year and suggested that partners calculate only the net
increase in tax in each intervening year. The comment described an
example of an adjustment that results from timing differences and
recommended that the push out statement include the beneficial effect
of deductions, if any, in subsequent years.
Consistent with section 6226(b)(2)(B), proposed Sec. 301.6226-
3(b)(3) provided that a correction amount for an intervening year is
the amount the partner's chapter 1 tax for such year would increase or
decrease after taking into account any adjustments to tax attributes
that resulted from taking into account the partnership adjustments in
the first affected year. Accordingly, in order to determine an
intervening year correction amount, the partner needs to know the
partnership adjustments for the reviewed year, which is information
provided on the push out statement furnished to the partner. See Sec.
301.6226-2(e). No changes were made to the regulation to respond to the
comment's request for clarification on this point. Regarding the
comment's suggestion that the correction amount for any intervening
year be calculated by reference to the partner's net increase in tax,
the rule under Sec. 301.6226-3(b)(3) accommodates this suggestion
because it accounts for both increases and decreases that would have
occurred in an intervening year. Therefore, no changes were made to the
regulations in response to this suggestion.
The comment also recommended that the regulations provide that each
partner calculates the correction amounts as though drafting an amended
return and that such calculation should be based on generally
applicable rules under the Code. The plain language of proposed Sec.
301.6226-3(b)(2) and (3) provided precise rules for calculating the
correction amounts. Those rules are consistent with how underpayments
and overpayments are generally calculated elsewhere in the Code and
regulations and thus provide for the method the comment recommended.
See, for example, Sec. 1.6664-2. Forms and instructions will provide
additional guidance for partners in computing correction amounts and
the additional reporting year tax. Providing this additional guidance
through forms and instructions allows for both the IRS and taxpayers to
gain experience with those documents and to recommend and to make
changes, as necessary and appropriate, without needing to amend the
regulations. This informal guidance process preserves government
resources and expedites the process by which the IRS can respond to
taxpayer needs and by which taxpayers are made aware of changes in IRS
procedures. Accordingly, no changes were made to the regulations in
response to this comment.
Two comments observed that an audit under the centralized
partnership audit regime may be concluded after the statute of
limitations for amending partner returns has expired. The comments
recommended that the statute of limitations should be automatically
extended to allow partners time to file an amended return and claim a
refund.
To the extent these comments were concerned about the inability to
benefit from any decreases in tax that would have resulted from taking
into account the adjustments under section 6226(b), those concerns are
addressed by proposed Sec. 301.6226-3(b) as revised in the August 2018
NPRM. As discussed earlier in this section of this preamble, the plain
language of Sec. 301.6226-3(b) allows partners to account for
increases and decreases that would have resulted in the first affected
year or any intervening year were the adjustments taken into account in
those years.
To the extent the comment was addressing seeking refunds via
amended returns outside the push out process, Sec. 301.6225-2(d)(2)
allows for modification of the imputed underpayment via partner amended
returns for taxable years for which the period of limitations would
otherwise be expired. See section 6225(c)(2)(D). To the extent the
comment was seeking a mandatory extension of all partner (direct and
indirect) statutes of limitation to file amended returns and claim a
refund, it is not in the interests of sound tax administration to
provide for automatic extensions where other mechanisms provide
adequate remedies for taxpayers. Under both the push out process and
the amended return modification procedures, partners may benefit from
decreases in tax that result from partnership adjustments. Creating an
additional automatic extension process to achieve the same results
potentially leads to more administrative burden for the IRS without any
tangible benefit for partners. Accordingly, the comments'
recommendation for automatic extensions in order to file refund claims
was not adopted.
Two comments suggested that the final regulations clarify whether a
partner must calculate and pay any additional taxes due under chapters
2 and 2A of the Code when taking into account adjustments under section
6226(b). One comment specifically asked about the application of
chapters 2 and 2A in the context of an election by the taxpayer to pay
the safe harbor amount. Another comment asked about the consequences of
failing to pay chapter 2 or 2A tax if the regulations imposed such a
requirement.
First, regarding the comment specific to the safe harbor amount,
the safe harbor amount was removed from the regulations in the December
2017 NPRM, no comments were received regarding its removal, and the
final regulations do not include a safe harbor amount. Accordingly,
inasmuch as this comment was concerned about the safe harbor amount,
this comment was not adopted.
Regarding the other comments, section 6226(b)(1) provides that each
partner's ``tax imposed by chapter 1'' shall be adjusted by the
aggregate of the correction amounts determined under section
6226(b)(2). Both section 6226(b)(2)(A) and (B) describe the correction
amounts as amounts by which the partner's ``tax imposed under chapter
1'' would increase if the partner's share of the adjustments were taken
into account. Consistent with section 6226(b), proposed Sec. 301.6226-
3(b) provided that each partner's chapter 1 tax for the reporting year
is increased or decreased by the amounts by which the partner's chapter
1 tax would increase or decrease were the adjustments taken into
account. The plain language of the statute and the proposed regulations
makes clear that a reviewed year partner only increases its chapter 1
reporting year tax by the aggregate of the correction amounts, which
are calculated by reference to the amounts by which the partner's
chapter 1 tax would increase or decrease for the first affected year or
any intervening year. Therefore, no changes were made to Sec.
301.6226-3(b) in response to this comment. Furthermore, because the
regulations do not require payment of chapter 2 or 2A taxes when a
partner takes into account adjustments under section 6226(b), the
consequences of failing to pay those taxes is beyond the scope of the
regulations.
ii. Penalties, Additions to Tax, and Additional Amounts
Former proposed Sec. 301.6226-3(a) provided that a reviewed year
partner
[[Page 6513]]
must pay the partner's share of any penalties, additions to tax, or
additional amounts determined at the partnership level reflected on the
statement furnished to the partner under Sec. 301.6226-2. See former
proposed Sec. 301.6226-2(e)(7) and (f)(3). Example 1 in former
proposed Sec. 301.6226-3(g) illustrated the application of this rule.
In the example, the IRS determines an imputed underpayment and a
related accuracy-related penalty in the amount of $32. The partnership
elects the application of section 6226 with respect to the imputed
underpayment and furnishes a statement to partner A, a 25 percent
partner, reflecting A's share of the adjustments and A's share of the
$32 penalty amount ($8). The example concludes that A must pay its $8
share of the penalty with its reporting year return.
One comment expressed concern with Example 1 under former proposed
Sec. 301.6226-3(g), particularly the result that a partner pays a
penalty amount based on the amount of the partnership's imputed
underpayment, rather than the amount of the partner's increased tax
liability. The comment recommended the regulations clarify that
penalties are not measured by reference to the imputed underpayment
amount determined at the partnership level.
This comment was addressed by proposed Sec. 301.6226-3(d), as
revised in the December 2017 NPRM. As revised, proposed Sec. 301.6226-
3(d)(2) provided that a reviewed year partner calculates the amount of
any penalty, addition to tax, or additional amount at the partner level
by treating a correction amount determined under Sec. 301.6226-3(b) as
if it were an underpayment or understatement for the first affected
year or intervening year, as applicable. If, after taking into account
the partnership adjustments, the reviewed year partner did not have an
underpayment, or had an underpayment that fell below the applicable
threshold for the imposition of a penalty, no penalty would be due from
the reviewed year partner. Proposed Sec. 301.6226-3(d)(2).
Accordingly, the proposed regulations make clear that a partner's
penalty is not based on the imputed underpayment amount determined at
the partnership level, as recommended by the comment. Example 1 under
Sec. 301.6226-3(h) was also revised to account for this rule change.
I. Penalty Defenses
Former proposed Sec. 301.6221(a)-1(c) had provided that any
defense to any penalty, addition to tax, or additional amount must be
raised by the partnership in the partnership-level proceeding,
regardless of whether the defense was based on facts and circumstances
relating to a person other than the partnership. As discussed in
section 1.A of this preamble, former proposed Sec. 301.6221(a)-1(c)
was removed from the regulations in the December 2017 NPRM. As part of
the revisions in the December 2017 NPRM, the regulations under section
6226 (former proposed Sec. 301.6226-3(i)) were also revised to provide
that the calculation of the partner's penalty amount in the case of a
push out election is based on the characteristics of, and facts and
circumstances applicable to, the reviewed year partner. In addition, a
reviewed year partner claiming that a penalty, addition to tax, or
additional amount is not due because of a partner-level defense may
raise that defense, but must first pay the penalty and file a claim for
refund for the reporting year. See proposed Sec. 301.6226-3(d)(3), as
revised in the August 2018 NPRM.
One comment recommended that the regulations clarify that a
partnership that makes a push-out election will be able to avail itself
of partner-level defenses at the partnership level. For the reasons
discussed in section 8.A. of this preamble, this comment was not
adopted. Under Sec. 301.6233(a)-1(c)(1), a partner-level defense may
not be raised in a proceeding of the partnership, including a
partnership that makes an election under section 6226, except as
otherwise provided in guidance prescribed by the IRS.
Two other comments recommended that the regulations should provide
a mechanism for partners to raise partner-level defenses prior to
assessment, rather than requiring the partner to first pay the penalty
and then file a claim for refund to raise the partner-level defense.
One comment specifically suggested that a partner could raise a
partner-level defense in the push out context by submitting a statement
supporting that defense with the partner's reporting year return. This
comment further suggested that the requirement to pre-pay penalties is
contrary to the procedures in place for similar scenarios involving
amended returns and audit adjustments. These comments were not adopted.
First, to the extent the comment addresses procedures for amended
returns and audit adjustments other than partnership adjustments, those
procedures are beyond the scope of these regulations. The centralized
partnership audit regime is a new set of procedures that does not have
an existing parallel in other areas of procedural tax law, and, as
such, other scenarios involving amended returns and audit adjustments
are not sufficiently similar to provide a relevant baseline against
which to determine how the centralized partnership audit procedures
should be developed.
Second, under the centralized partnership audit regime, the
applicability of penalties, additions to tax, and additional amounts
that relate to partnership adjustments is determined at the partnership
level. Section 6221(a). A push out statement furnished to a partner
under Sec. 301.6226-2 will include any penalties, additions to tax, or
additional amounts determined at the partnership level that are
applicable to the adjustments pushed out to that partner. The
applicability of such penalties, additions to tax, and additional
amounts as set forth in the push out statement furnished to the partner
are binding on the partner pursuant to section 6223. See Sec.
301.6226-1(e). Therefore, when taking into account the pushed out
adjustments, the applicability of any penalties related to those
adjustments has already been determined. The imposition and amount of
the penalty is determined only upon the partner calculating the
additional reporting year tax (or imputed underpayment in the case of
pass-through partners) and applying any relevant threshold amounts.
Because the IRS has already determined that a penalty applies, it
is contrary to the interests of sound tax administration to allow
partners to argue they are not liable for the penalty based on partner-
specific reasons without first requiring payment of the penalty.
Allowing a partner to raise a partner-level defense without prepaying
the penalty would require the IRS to check each reviewed year partner's
return to see if a penalty defense was properly raised and open up an
examination of the partner to determine the validity of the defense.
Such a process would frustrate the collection of the penalties, the
applicability of which was already determined at the partnership level
in an examination. Requiring pre-payment of penalties before defenses
are raised ensures that partners raise only colorable penalty defense
claims. For those that do not have such claims, it will ensure
immediate collection of the appropriate amount of penalties.
One comment observed that, as a practical matter, it is unclear how
a limited partner would dispute penalties determined at the partnership
level, particularly because the partner may have no or limited
information of actions at the partnership level or
[[Page 6514]]
control over such actions even if known. The comment recommended
clarifying what constitutes reasonable cause or good faith under
circumstances that will be common among partnerships with limited
partners.
Proposed Sec. 301.6226-3(d)(3) defined partner-level defenses as
those defenses that are personal to the reviewed year partner and based
on the facts and circumstances applicable to that partner (for example,
a reasonable cause and good faith defense under section 6664(c) based
on facts specific to a particular partner). Limited partners will have
an opportunity to raise defenses specific to their facts and
circumstances. The partners (limited partner or otherwise) should have
all of the information needed to adequately raise a partner-level
defense because that defense is based on the facts and circumstances
applicable to the specific partner raising the defense. The partner
does not need new information regarding partnership-level actions or
control over partnership-level information that the partner did not
have access to at the time it took a position on its return reflecting
the items from the partnership subject to penalty. The centralized
partnership audit regime does not alter the existing law under the
Code, regulations, or applicable case law relating to reasonable cause
and good faith determinations. Furthermore, as discussed in section 8.A
of the preamble, any defense that is based on the conduct or actions of
the partnership is a partnership-level defense that must be raised by
the partnership during the partnership proceeding. See proposed Sec.
301.6233(a)-1(c)(2)(v).
II. Partnership Payment of Penalties on Behalf of Partners
One comment recommended that the partnership have the option of
paying penalties at the partnership level while pushing out the
partnership adjustments to its partners. The comment noted that pushing
out penalties may require long and complex explanations regarding why
the penalties apply, which could be burdensome to the partnership,
partners, and the IRS, and may cause friction among the partners.
Section 6226(c)(1) provides that any penalties, additions to tax,
or additional amounts shall be determined as provided under section
6221, and the partners of the partnership for the reviewed year shall
be liable for any such penalty, addition to tax, or additional amount.
If the partnership were to pay any penalties, additions to tax, or
additional amounts in lieu of pushing out those amounts to its
partners, the payment would be a payment towards the liability of the
partners, not the partnership. The ability of a person to make a
payment towards another's tax liability currently exists outside of the
centralized partnership audit regime, and the regime does not alter or
affect this ability. The partnership and its partners may enter into a
business arrangement whereby the partnership makes a payment towards
the partner's penalty liabilities, or whereby the partnership remits an
amount to each partner to compensate for any potential penalties,
additions to tax, or additional amounts. Nothing in the regulations
under Sec. 301.6226-3 would disturb those types of arrangements.
At the same time, the regulations do not provide a specific method
for making such payments. Creating and monitoring a separate system to
allow for partnerships to pay penalties on behalf of its partners would
be burdensome for the IRS, partnerships, and partners. As discussed
earlier in this section of the preamble, under proposed Sec. 301.6226-
3(d)(2) a partner's penalty amount is calculated based on the facts and
circumstances unique to each partner. For the partnership to fully pay
the amount of penalties owed by its partners, the partnership would
need to obtain detailed information about each partner's personal tax
situation, which is burdensome for the partnership and potentially
invasive to the partners. This information would also have to be
transmitted to the IRS to verify the correct penalty amount was paid
and reflected in each partner's account. For these reasons, this
comment was not adopted.
Another comment similarly suggested that the IRS create a process
by which the partnership could pay both interest and penalties on
behalf of its foreign partners so that those foreign partners would not
need to obtain a TIN to file a U.S. tax return to report and pay
interest and penalties. The comment suggested that the IRS could
require, as part of that process, the partnership to obtain
documentation from the foreign partner authorizing the partnership to
make the payment on the foreign partner's behalf. The comment also
recommended that the regulations make clear such a payment would not
preclude the partnership from making a push out election with respect
to the adjustments. This comment was not adopted.
As discussed earlier in this section of this preamble, there are
administrative difficulties involved with adopting a specific method
for a partnership to determine and pay over to the IRS its partners'
amounts of penalties and interest. Further, because penalties and
interest are determined at the partner level, a partnership will
generally not be able to pay the exact amount of penalties and interest
due with respect to each foreign partner. Therefore, there would be no
basis for waiving the filing requirement for a foreign partner under
these circumstances, even in cases in which the partnership is able to
satisfy the tax due at source. For these reasons, the comment's
suggestion was not adopted and no changes were made to the regulations
in response to the comment.
III. Interest on Penalties, Additions to Tax, and Additional Amounts
Section 6226(c)(2) provides that in the case of a push out
election, interest shall be 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. Proposed Sec. 301.6226-3(c)(1) provided
that interest on each correction amount greater than zero is calculated
from the due date (without extension) of the reviewed year partner's
return for the applicable taxable year until the amount is paid. For
purposes of calculating interest on any penalties, additions to tax, or
additional amounts, proposed Sec. 301.6226-3(c)(2) similarly provided
that such interest is calculated from the due date (without extension)
of the reviewed year partner's return for the applicable taxable year
until the amount is paid.
One comment observed that section 6226(c)(2) is silent as to
whether the due date of the return for the purpose of calculating
interest is determined with or without regard to any extension of time
for filing, and noted that the statute does not differentiate between
interest on tax and interest on penalties and additions to tax. The
comment recommended the regulations adopt a bifurcated approach under
which interest would run on the correction amounts from the due date of
the return without regard to extensions while interest on penalties
would run from the due date of the return including any extensions. The
comment observed a similar bifurcated approach exists for calculating
interest on tax and certain penalties outside the partnership context.
After consideration, the Treasury Department and the IRS have
adopted this comment to be consistent with the method of calculating
interest on penalties outside of the centralized partnership audit
regime pursuant to section 6601(e)(2)(B). Accordingly, Sec. 301.6226-
3(c)(2) now provides that
[[Page 6515]]
interest on any penalties, additions to tax, or additional amounts is
calculated from the due date (including any extension) of the reviewed
year partner's return for the applicable tax year until the amount is
paid.
IV. Interest on the Additional Reporting Year Tax
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 explained in section 4.A of
the preamble to the August 2018 NPRM, while 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, the
TTCA did not similarly amend the reference to ``increases'' in section
6226(c)(2). The result of the changes to section 6226 is 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 on 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) provided 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.
One comment suggested that the final regulations clarify that the
IRS will pay interest on any refunds issued on prior overpayments
resulting from a taxpayer's statements filed under section 6226 with
their reporting year return. The comment expressed the belief that the
rule under section 6226(c)(2) is only intended to increase the normal
statutory rate of interest imposed, not to exclude interest on
overpayments.
The additional reporting year tax is calculated under section
6226(b)(2) by reference to the amount that a partner's chapter 1 tax
``would'' increase or decrease if the partner's share of adjustments
``were taken into account'' in the first affected year or in the case
of an intervening year, the amount by which such tax would increase or
decrease by reason of the adjustment to tax attributes. An adjustment
to a tax attribute is any tax attribute which ``would have been
affected'' if the adjustments ``were taken into account'' in the first
affected year. Under the language of section 6226(b)(2) and (3),
adjustments are not actually taken into account like they would be if
an amended return was filed under Sec. 301.6225-2(d)(2). Similarly,
the increases or decreases do not actually occur as they would in the
amended return context and tax attributes are not actually adjusted as
part of this calculation. Accordingly, in the case of an increase in
tax that would result in the first affected year or any intervening
year if the adjustments were taken into account, no overpayment results
for any year because there is an increase in tax, not a decrease. In
the case of a decrease in tax that would result in the first affected
year or any intervening year if the adjustments were taken into
account, there is no overpayment because the determination of a
decrease in tax is merely by reference to the relevant year to be taken
into account as part of the total additional reporting year tax.
Therefore, no overpayment interest is due and owing to the partner.
iii. Pass-Through Partners
The June 2017 NPRM reserved on the issue of how a pass-through
partner takes into account its share of adjustments reflected on a
statement furnished to the pass-through partner under Sec. 301.6226-2.
In response to the June 2017 NPRM, multiple comments recommended that
pass-through partners take into account adjustments by pushing out
those adjustments to the next tier of partners and suggested approaches
to achieve this result.
After careful consideration of those comments, the December 2017
NPRM adopted an approach that required a pass-through partner to take
into account adjustments reflected on a push out statement by either
furnishing statements to its own partners or by paying an amount
calculated like an imputed underpayment with respect to the
adjustments, plus any applicable penalties and interest. See former
proposed Sec. 301.6226-3(e)(1). The regulations created an iterative
process under which any pass-through partner receiving a statement from
another pass-through partner must also take into account the
adjustments on the statement by furnishing statements to its own
partners or paying an amount calculated like an imputed underpayment.
Any ultimate, non-pass-through partner was required to take into
account its share of the adjustments as if such partner was a reviewed
year non-pass-through partner. If a pass-through partner failed to take
into account the adjustments in accordance with former proposed Sec.
301.6226-3(e)(1), the pass-through partner was required to pay an
amount calculated like an imputed underpayment plus any applicable
penalties and interest.
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 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. The rules under former proposed Sec. 301.6226-
3(e) were revised in the August 2018 NPRM to reflect the amendment to
section 6226(b)(4). See section 4.A. of the preamble to the August 2018
NPRM.
Three comments were received regarding proposed Sec. 301.6226-
3(e). The comments focused on three topics: (1) The statements
furnished under proposed Sec. 301.6226-3(e)(3); (2) the computation of
an imputed underpayment under proposed Sec. 301.6226-3(e)(4); and (3)
the payment of the additional reporting year tax by affected partners
in accordance with proposed Sec. 301.6226-3(e)(4)(iv).
I. Statements Furnished Under Sec. 301.6226-3(e)(3)
Proposed Sec. 301.6226-3(e)(1) provided that each pass-through
partner that is furnished a statement described in Sec. 301.6226-2
with respect to adjustments of an audited partnership must file and
furnish statements to its affected partners. Affected partners are
persons 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 relate. Consistent with section
6226(b)(4)(B), proposed Sec. 301.6226-3(e)(3)(ii) provided that a
pass-through partner must furnish such statements no later than the
extended due date for the return for the adjustment year of the audited
partnership. One comment recommended that the regulations provide a
process by which a pass-through partner could apply to the IRS for a
discretionary short-term extension of the time period set out in
proposed Sec. 301.6226-3(e)(3)(ii). This extension would address
exceptional or unusual circumstances in which a pass-through
[[Page 6516]]
partner is unable to furnish the statements to all its affected
partners within the specified time frame. This comment was not adopted.
Section 6226(b)(4)(B) expressly provides that statements under
section 6226(b)(4)(A) ``shall be furnished by not later than the due
date for the return for the adjustment year of the audited
partnership.'' The statute does not provide for an extension beyond the
extended due date of the adjustment year return. Under proposed Sec.
301.6226-3(e)(3)(ii), the adjustment year return 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. As a threshold matter, the language of section
6226(b)(4)(B), providing that statements ``shall be furnished not later
than'' the due date suggests that discretionary extensions are not
permissible. Furthermore, the due date for furnishing statements to
affected partners must be fixed for all pass-through partners for the
IRS to ensure statements are furnished timely and payments are timely
made. In addition, the ultimate affected partners are obligated to file
and pay additional reporting year tax by the extended due date of the
audited partnership. Extending the due date for furnishing statements
to affected partners for any pass-through partner would cause delays
for upper tier affected partners and potentially subject ultimate
affected partners to penalties for filing or paying additional
reporting year tax more than 30 days after the extended due date.
Therefore, the regulations do not provide for discretionary extensions
of the time period that was set forth in proposed Sec. 301.6226-
3(e)(3)(ii).
Another comment observed that the proposed regulations did not
specify who at the IRS must receive the statements furnished by a pass-
through partner and recommended that the final regulations clearly
state to whom at the IRS pass-through partner statements should be
directed. This comment was not adopted, but the regulations were
revised to provide that a pass-through partner must file and furnish
statements to its affected partners in accordance with forms,
instructions, or other guidance prescribed by the IRS. Providing the
method for filing and furnishing statements in forms, instructions, and
other guidance provides the IRS with the flexibility to change the
filing and furnishing procedures as appropriate and necessary without
needing to amend the regulations. This flexibility is particularly
important as the IRS gains experience with the centralized partnership
audit regime. Flexibility also preserves government resources and will
expedite the process for the IRS to respond to taxpayer needs and for
taxpayers to be aware of changes in IRS procedures.
Under Sec. 301.6226-3(e)(3)(iii), each statement furnished by a
pass-through partner must include correct information concerning
certain enumerated items. These items include the name and TIN of the
affected partner to whom the statement is being furnished as well as
any other information required by forms, instructions, and other
guidance prescribed by the IRS. One comment suggested that the
regulations should clarify whether a statement provided under proposed
Sec. 301.6226-3(e) would be effective without the TIN of the affected
partner if the affected partner is a foreign person not otherwise
required to obtain a TIN. The comment observed that foreign persons
generally are not required to obtain a U.S. TIN, particularly if they
will not claim the benefits of a U.S. tax treaty.
Proposed Sec. 301.6226-3(e)(3)(iii) required each statement
furnished by a pass-through partner to include the correct TIN of the
affected partner. This information is critical to the administration of
the push out regime because it allows the IRS to identify the person to
whom the statement is furnished, and it provides the IRS with the
ability to match the adjustments on that statement with the return
filed by the affected partner. In response to this comment, however,
the final regulations require that a push out statement furnished under
Sec. 301.6226-3(e) include the partner's TIN ``or alternative form of
identification as prescribed by forms, instructions, or other
guidance.'' See also Sec. 301.6226-2(e) (imposing the same requirement
for push out statements furnished to reviewed year partners). In
addition, the election under Sec. 301.6226-1 by the audited
partnership must include the TIN ``or alternative form of
identification as prescribed by forms, instructions, or other
guidance'' for each reviewed year partner of the partnership. See Sec.
301.6226-1(c)(3)(ii). The addition of the quoted language in each
section contemplates that there may be situations in which an
alternative form of identification for certain partners is warranted.
Accordingly, as the IRS gains experience with the centralized
partnership audit regime, the IRS may allow for the use of an
alternative form of identification through forms, instructions, or
other guidance if the IRS determines such identification is appropriate
for foreign persons. This flexibility gives the IRS and partnerships
time to evaluate whether an alternative form of identification is
administrable and beneficial without needing to amend the regulations
to allow for alternative identification, which preserves government
resources and expedites the process by which the IRS responds to
taxpayer needs and taxpayers become aware of changes in IRS procedures.
The same comment also recommended that to the extent practicable,
the IRS identify as soon as possible any additional information that
may be required in additional forms, instructions, or other guidance
for statements under Sec. 301.6226-3(e)(3). The comment suggested
regulations or drafts of forms or instructions could identify such
additional information, which would allow partnerships to timely,
completely, and accurately collect necessary data from partners to
comply with requirements and avoid the risk that the IRS would deny a
push out election due to incomplete or inaccurate or untimely data.
As discussed earlier in this section of the preamble, maintaining
the ability to require additional information on forms, instructions,
or other guidance gives the IRS the flexibility to adapt statements
without having to amend the regulations. At the same time, the IRS
recognizes the need of taxpayers to know of the information required to
not jeopardize compliance with the regulations. The IRS plans to
develop and release drafts of forms and instructions for public
inspection as soon as possible.
In addition to the changes described earlier in this Summary of
Comments and Explanation of Revisions, two other clarifying changes
were made to Sec. 301.6226-3. First, Sec. 301.6226-3(e)(3)(iii)(M)
was clarified to provide that the information required to be included
in statements furnished to affected partners regarding the
applicability of penalties, additions to tax, or additional amounts are
the determinations made at the audited partnership level pertaining to
the applicability of penalties, additions to tax, or additional
amounts. This change reinforces the notion that the applicability of
penalties is determined at the audited partnership level and that
penalties attach to adjustments as they are pushed out through the
tiers. An affected partner that pays an imputed underpayment or
additional reporting year tax independently determines the amount of
any penalty applicable to
[[Page 6517]]
adjustments that are taken into account by the affected partner.
In addition, Sec. 301.6226-3(e)(4)(iv)(B) was clarified to provide
that when determining interest on an imputed underpayment paid by a
pass-through partner, the imputed underpayment is treated as if it were
a correction amount for the first affected year. This change conforms
the language in Sec. 301.6226-3(e)(4)(iv)(B) with the language in
Sec. 301.6226-3(c) regarding interest on correction amounts.
II. Modifications Available to Pass-Through Partner Paying an Imputed
Underpayment
If a pass-through partner does not furnish statements, the pass-
through partner must compute and pay an imputed underpayment in
accordance with proposed Sec. 301.6226-3(e)(4). Section
6226(b)(4)(A)(ii)(II); proposed Sec. 301.6226-3(e)(2). Pursuant to
proposed Sec. 301.6226-3(e)(4)(iii), this imputed underpayment is
computed in the same manner as an imputed underpayment under section
6225 and Sec. 301.6225-1. In calculating an imputed underpayment under
proposed Sec. 301.6226-3(e)(4)(iii), a modification is taken into
account if it was approved by the IRS under Sec. 301.6225-2 with
respect to the pass-through partner (or any relevant partner holding
its interest in the audited partnership through the pass-through
partner) and it is reflected on the statement furnished to the pass-
through partner. Any modification that was not approved by the IRS
under Sec. 301.6225-2 may not be taken into account. Proposed Sec.
301.6226-3(e)(4)(iii).
One comment suggested that it was unclear under proposed Sec.
301.6226-3(e)(4) whether a pass-through partner that elects to pay an
imputed underpayment is only permitted to make modifications that are
included on the information statement furnished to the pass-through
partner or whether the pass-through partner also may make modifications
based on the pass-through partner's own partners (to the extent such
modification is not already reflected on the information statement).
The comment recommended that the pass-through partner be permitted to
make modifications based on its own partners to the extent the pass-
through partner would be permitted to make modifications under section
6225 if it were the partnership directly under audit. This comment was
not adopted.
Section 6226(b)(4)(A)(ii)(II) provides that a partnership may
compute and pay an imputed underpayment under rules similar to the
rules of section 6225 (other than section 6225(c)(2), (7), and (9)).
Section 6226(b)(4)(A)(ii)(II) does not explicitly carve out section
6225(c)(8), which provides that any modification of the imputed
underpayment amount under section 6225(c) shall be made only upon
approval of such modification by the Secretary. Consistent with section
6225(c)(8), proposed Sec. 301.6226-3(e)(4)(iii) only allows
modifications approved by the IRS under proposed Sec. 301.6225-2 to be
taken into account in calculating an imputed underpayment with respect
to a pass-through partner. Modifications approved by the IRS under
Sec. 301.6225-2 are only those modifications requested by the audited
partnership and approved during the administrative proceeding with
respect to the audited partnership. See Sec. 301.6225-2(b). A pass-
through partner may not use modifications that were not requested or
approved in the administrative proceeding with respect to the audited
partnership in calculating its imputed underpayment under proposed
Sec. 301.6226-3(e)(4).
Allowing a pass-through partner to apply modifications that were
not previously requested or approved in calculating its imputed
underpayment is contrary to the centralized nature of an administrative
proceeding under the centralized partnership audit regime. Partnership
adjustments are determined at the partnership level. Section 6221(a).
The imputed underpayment is a partnership-related item and therefore
modifications to the imputed underpayment are determined at the
partnership level. The modification provisions under Sec. 301.6225-2
are the appropriate method for determining whether and to what extent a
modification should be allowed. Allowing pass-through partners to
raise, for the first time, modifications during the push out is
inconsistent with making such determinations at the partnership level.
Allowing such modifications would create significant administrative
burdens for the IRS. For one, the IRS would have to expend increased
time and resources to review any modifications applied during push out
that were not previously evaluated and approved during the modification
process at the audited partnership level. This concern would be
exacerbated in situations where there are multiple tiers of entities
applying multiple types of additional modifications. For instance, a
pass-through partner might raise again a modification that was rejected
by the IRS at the audited partnership level during the modification
process, causing further administrative delay and burden. Furthermore,
if a modification applied by a pass-through partner was incorrectly
applied, the IRS would have to expend time and resources to correct the
incorrectly claimed modification, resulting in additional delays in the
collection of amounts due as a result of the examination and the push
out election.
III. Payment of Additional Reporting Year Tax by Affected Partners
Proposed Sec. 301.6226-3(e)(3)(iv) provided that affected partners
that are not pass-through partners must take into account their share
of adjustments reflected on a statement furnished under proposed Sec.
301.6226-3(e)(3) in accordance with proposed Sec. 301.6226-3(e). When
taking into account the adjustments, an affected partner that is not a
pass-through partner bases its reporting year on the date the audited
partnership furnished its statements to its reviewed year partners. As
a result, the reporting year of an affected partner that is not a pass-
through partner will be the same taxable year as the reporting year of
a reviewed year partner that is also not a pass-through partner.
As discussed in section 1 of the Explanation of Provisions in the
preamble to the December 2017 NPRM, there may be circumstances in which
a statement is not furnished to an affected partner that is not a pass-
through partner in time for the partner to report and pay the
additional reporting year tax by the unextended due date of the
partner's return for the reporting year. To account for this situation,
proposed Sec. 301.6226-3(e)(3)(iv) provided that the IRS will not
impose any additions to tax under section 6651 related to any
additional reporting year tax if an affected partner that is not a
pass-through partner reports and pays any additional reporting year tax
within 30 days of the extended due date for the return for the
adjustment year of the audited partnership.
One comment recommended that the 30-day period under proposed Sec.
301.6226-3(e)(3)(iv) should be extended to at least 60 days and that
there be a mechanism for requesting and obtaining an extension of this
deadline when needed. This comment was not adopted.
While it may be difficult to accurately compute and pay the
additional reporting year tax in situations where the affected partner
receives the statement close in time to the extended due date of the
reporting year return, the affected partner has options available to
mitigate any additions to tax under section 6651. First, the
regulations under Sec. 301.6226-3(e)(3)(iv) provide a 30-day period in
which the IRS will not
[[Page 6518]]
impose a section 6651 penalty. Second, the affected partner may make an
estimated tax payment prior to the due date for the reporting year and
use that payment as a credit against any potential liability for the
additional reporting year tax to avoid failure to pay penalties.
Third, the affected partner may also request that any additions to
tax under section 6651 be abated due to reasonable cause. Nothing in
the regulations under the centralized partnership audit regime alters
the mechanisms by which a taxpayer may raise a reasonable cause defense
in response to a proposed penalty. Existing regulations under Sec.
301.6651-1(c)(1) and the Internal Revenue Manual provide procedures for
raising a reasonable cause defense to avoid an addition to tax under
section 6651. If an addition to tax under section 6651 is asserted
because a taxpayer did not pay the entire additional reporting year tax
within 30 days of the extended due date of the audited partnership's
adjustment year return, the taxpayer may follow those existing
procedures to raise any reasonable cause and good faith defense that
may be applicable to the taxpayer's delay in payment.
iv. Qualified Investment Entities and MLPs
Proposed Sec. 301.6226-3(b)(4) provided rules for qualified
investment entities (QIEs), such as real estate investment trusts and
regulated investment companies, to utilize the deficiency dividend
procedures under section 860 when taking into account the adjustments
under section 6226(b). One comment recommended that the Treasury
Department and the IRS adopt the rules as proposed in Sec. 301.6226-
3(b)(4) without change in the final regulations. This comment was
adopted.
Another comment recommended that in the case of an MLP, the safe
harbor calculation for a partner should take into account the partner's
share of specified passive activity losses within the meaning of
section 6225(c)(5)(B). As discussed earlier in this section of the
preamble, the safe harbor amount was removed from the regulations in
the December 2017 NPRM, no comments were received regarding its
removal, and the final regulations do not include a safe harbor amount.
Accordingly, this comment was not adopted.
v. Examples Under Proposed Sec. 301.6226-3(h)
Proposed Sec. 301.6226-3(h) provided examples that illustrated the
rules of proposed Sec. 301.6226-3. One comment recommended that
additional examples be added to Sec. 301.6226-3(h) to show the proper
treatment of two situations. The first situation involved the IRS
approving a modification based on a partner filing an amended return,
the partnership challenging the IRS's adjustment in Tax Court, and the
amount of the adjustment being subsequently reduced. The second
situation involved the IRS determining at the partnership level a 20
percent accuracy-related penalty with respect to the partnership
adjustments and the IRS approving a modification based on a partner's
status as a tax-exempt entity. The comment suggested that the example
illustrate how the amount of the penalty is calculated in this
situation after allowance for the modification with respect to the tax-
exempt entity and how the penalty is allocated among all partners,
including the tax-exempt entity.
These hypotheticals were described within the portion of the
comment addressing section 6226. Therefore, notwithstanding that the
comment did not explicitly state that the partnership in the
hypothetical made a push out election, for purposes of addressing these
comments it is assumed that the partnership did make the push out
election. After careful consideration, the Treasury Department and the
IRS have declined to add these examples because, as described in this
section of the preamble, both situations describe fact patterns that
are addressed by a straight forward application of the proposed
regulations, as revised in the December 2017 and August 2018 NPRMs, and
thus the examples would not help clarify any aspect of the rules.
The first situation is addressed by proposed Sec. 301.6226-3(b)(2)
and (3), which provided that in calculating a correction amount,
decreases in tax should be taken into account and that amounts shown on
amended return filed during modification should be accounted for in the
calculation. As described earlier in section C.i. of this preamble,
proposed Sec. 301.6226-3(b)(2) and (3) was revised in the August 2018
NPRM to reflect the amendments to section 6226(b) by the TTCA. As
amended, section 6226(b) provides that when a reviewed year partner
takes into account pushed out adjustments, the partner's chapter 1 tax
for the reporting year is adjusted by the amounts the partner's chapter
1 tax for the first affected year or any intervening year would
increase or decrease if the partner's share of the adjustments were
taken into account in the first affected year. As a result, under
proposed Sec. 301.6226-3(b)(2) and (3) as revised in the August 2018
NPRM, a correction amount and the additional reporting year tax can be
less than zero.
When the partner in the first hypothetical calculates the
correction amount for the year that was amended, the partner recomputes
its tax for the year by starting with the amount of tax shown on the
amended return, which had been based on the full amount of the
adjustment (prior to its reduction by the court decision). The partner
then determines the amount the partner's chapter 1 tax would have
increased or decreased were the reduced adjustment taken into account
for that year. If the partner's tax for the amended year decreases as a
result of the reduced adjustment, that decrease in tax produces a
negative correction amount, which in turn produces a negative
additional reporting year tax. The negative additional reporting year
tax would then reduce the partner's tax for the reporting year.
The second situation is addressed by proposed Sec. 301.6226-3(d)
as previously revised in the December 2017 NPRM. As discussed earlier
in this section of the preamble, proposed Sec. 301.6226-3(d)(2)
provided that each reviewed year partner calculates its penalty amount
by treating the correction amounts determined under Sec. 301.6226-3(b)
as if they were underpayments or understatements for the first affected
year or any intervening year. This rule is different from the rule
initially set forth in former proposed Sec. 301.6226-2(f)(3). Under
the former rule, to which the comment's recommendation related, each
partner was allocated their share of the penalty that was calculated at
the partnership level. Under the rule in proposed Sec. 301.6226-3(d),
however, a partner's penalty calculation is based on the
characteristics of, and facts and circumstances applicable to, the
reviewed year partner. Accordingly, while the applicability of the
accuracy-related penalty in the second hypothetical described by the
comment was determined at the partnership level, if as a result of
taking into account the adjustments under Sec. 301.6226-3(b), the tax-
exempt entity would not have an underpayment or understatement for
which a penalty was applicable, the penalty amount calculated by the
tax-exempt entity pursuant to Sec. 301.6226-3(d)(2) would be zero.
Whether modification was requested or approved with the tax-exempt
entity would not affect this determination.
The same comment also recommended adding an example to show the
proper application of partner and partnership-level tax attributes to
the calculation of a correction amount
[[Page 6519]]
for an intervening year. This recommendation was also not adopted.
Former proposed Sec. 301.6241-1(a)(10) had defined the term tax
attribute to include both the tax attributes of the partnership and the
tax attributes of its partners. This definition was changed in the
August 2018 NPRM to remove references to the partnership or the
partner. This change allows ``tax attribute'' to apply to the
partnership or to a partner depending on the particular context within
which it is used. See section 11.A. of the preamble to the August 2018
NPRM. As a result, the definition of tax attribute in proposed Sec.
301.6241-1(a)(10), as revised, did not refer to either the partnership
or its partners.
Former proposed Sec. 301.6226-3(b)(3) had provided that an
intervening year correction amount was derived by recomputing a
partner's taxable income by taking into account any adjustments to tax
attributes. After the change to the definition to tax attribute,
proposed Sec. 301.6226-3(b)(3) was revised to make clear that in the
context of calculating an intervening year correction amount, it is the
``tax attributes of the partner'' that are relevant, not the tax
attributes of the partnership. As a result, under proposed Sec.
301.6226-3(b)(3) as revised in the August 2018 NPRM, partnership-level
tax attributes no longer factor into the calculation of an intervening
year correction amount. See proposed Sec. 301.6226-3(h), Example 7;
section 4.A. of the preamble to the August 2018 NPRM. Given these
revisions, an example showing the application of partnership-level tax
attributes would no longer be accurate for computing an intervening
correction amount under Sec. 301.6226-3(b)(3).
The Treasury Department and the IRS have also declined to add an
example illustrating the application of a partner's tax attributes to
the calculation of its correction amount for an intervening year.
Creating an example involving the tax attributes of a specific partner
would necessitate a description of that particular partner's tax
profile and would require a number of assumptions that would strip the
example of its utility.
Example 5 of proposed Sec. 301.6226-3(h) described a situation in
which the IRS determines a $200 partnership adjustment with respect to
taxable year 2020 and a resulting $40 imputed underpayment. During the
modification process, Partner F files amended returns for 2020, 2021,
and 2022 taking into account F's share of the $200 partnership
adjustment, and the IRS approves that modification. See Sec. 301.6225-
2(d)(2). The partnership elects to make a push out election with
respect to the $40 imputed underpayment and furnishes a statement to F
reflecting F's share of the $200 partnership adjustment and reflecting
the approval of F's amended return modification.
Former proposed Sec. 301.6226-3(g) had provided that F computes
its correction amounts for the first affected year and the intervening
years and that F ``computes any additional chapter 1 tax for those
years using the returns for 2020, 2021, and 2022 taxable years as
amended during the modification process.'' One comment found the quoted
language ambiguous and recommended the language be revised to provide
that ``F's computation will take into account the additional chapter 1
tax that F reported and paid pursuant to the modification process on
amended returns for the 2020, 2021, and 2022 taxable years.'' This
comment has been adopted.
Although F takes into account the chapter 1 tax F reported and paid
with its amended returns, F still must compute the correction amounts
for each year under Sec. 301.6226-3(b). F cannot assume F's additional
reporting year tax is zero because of the fact F filed an amended
return and took into account the adjustments during the modification
process. For example, F may have inadvertently taken the adjustments
into account incorrectly when filing its amended returns or filed a
subsequent amended return, and as a result F may compute an additional
reporting year tax that is greater than (or possibly less than) zero
when F performs the calculation under Sec. 301.6226-3(b) for the
reporting year.
The comment also recommended changing the language ``[t]he time to
file a petition expires on'' in Examples 2-4 and 6-9 under proposed
Sec. 301.6226-3(h) to ``[t]he last day to file a petition is.'' Under
Sec. 301.6226-2(b)(1)(i), if a petition is not filed under section
6234, the adjustments become finally determined upon the expiration of
the time to file a petition under section 6234. Although this is
determined in relation to the last day to file a petition under section
6234, the language in the examples mirrors the regulatory language
under Sec. 301.6226-2(b)(1)(i). Changing the language in the examples
to differ from the language in the rule could create confusion and
ambiguity. Accordingly, this comment was not adopted.
Lastly, several comments noted typographical errors and incorrect
cross-references in the examples under former proposed Sec. 301.6226-
3. These errors were fixed in proposed Sec. 301.6226-3(h). See section
4.B. of the preamble to the August 2018 NPRM.
5. Administrative Adjustment Requests
Four comments were received concerning administrative adjustment
requests under section 6227. The comments addressed the following
topics: (1) The requirement that the partnership representative must
sign an AAR; (2) the ability to report multiple imputed underpayments
in a single AAR; (3) the modifications available in the case of an AAR;
(4) how partners take into account adjustments requested in an AAR; (5)
the availability of the safe harbor amount; (6) the application of
section 905(c); and (7) how partnerships that have elected out of the
centralized partnership audit regime file amended returns. In addition
to addressing the comments, this section of the preamble explains a
change to the rules regarding whether an AAR is valid if it fails to
include required statements and interest with respect to imputed
underpayments reported on an AAR.
A. Requirement That the Partnership Representative Signs an AAR
Proposed Sec. 301.6227-1(c) provided the form and manner for
making an AAR under the centralized partnership audit regime, including
the rule that an AAR must be signed under penalties of perjury by the
partnership representative. One comment recommended that the
regulations remove the requirement that the partnership representative
sign an AAR and instead allow any person authorized to sign the
original partnership return to sign the AAR. This comment was not
adopted.
Under section 6223(b), the partnership and all partners of such
partnership are bound by actions taken under the centralized
partnership audit regime by the partnership. See Sec. 301.6223-2(a).
The filing of an AAR under section 6227 is an action under the
centralized partnership audit regime. Under section 6223(a), the
partnership representative has the sole authority to act on behalf of
the partnership under the centralized partnership audit regime.
Consequently, only the partnership representative has the authority to
file an AAR under section 6227, and the final regulations maintain the
requirement that the partnership representative sign an AAR.
The comment expressed concern that, in some circumstances,
obtaining the signature of the partnership representative could be
difficult or impossible. For example, if the partnership representative
is deceased or where a partnership representative
[[Page 6520]]
whose designation is being revoked refuses to sign the AAR. The
regulations under section 6223 and 6227 accommodate the concern
illustrated in these examples. Under Sec. 301.6223-1(e)(2)(ii), a
partnership may revoke a designation of a partnership representative by
filing a valid AAR in accordance with section 6227. The revocation must
include a designation of a successor partnership representative. Sec.
301.6223-1(e)(1). Both the revocation and the designation are effective
on the date the partnership files the AAR. Sec. 301.6223-1(e)(3).
Proposed Sec. 301.6227-1(a) provided that when the partnership
changes the designation of the partnership representative in
conjunction with the filing of an AAR in accordance with Sec.
301.6223-1(e), the change in designation is treated as occurring prior
to the filing of the AAR. Under this rule, the prior partnership
representative is revoked and a new partnership representative is
designated prior to the time the AAR is filed, with the result that the
newly designated partnership representative is the partnership
representative of record at the time the AAR is filed. This rule was
designed to address the circumstances described by the comment when it
may be difficult to obtain the signature of the prior partnership
representative and to make clear that it is the newly designated
partnership representative that signs an AAR. Because Sec. 301.6227-
1(a), in connection with the regulations under section 6223, adequately
address the concerns raised by the comment, the comment was not
adopted.
B. Multiple Imputed Underpayments
Proposed Sec. 301.6227-1(a) provided that when filing an AAR, the
partnership must determine whether the adjustments requested in the AAR
result in an imputed underpayment. Under proposed Sec. 301.6227-
2(a)(1), the determination of whether adjustments requested in an AAR
result in an imputed underpayment and the determination of the amount
of the imputed underpayment is made in accordance with the rules under
Sec. 301.6225-1. Generally, a partnership must pay any imputed
underpayment determined under Sec. 301.6227-2(a) resulting from the
adjustments requested in an AAR on the date the partnership files the
AAR. Proposed Sec. 301.6227-2(b). In lieu of paying the imputed
underpayment under Sec. 301.6227-2(b), the partnership may elect to
have each reviewed year partner take into account the adjustments
requested in the AAR in accordance with Sec. 301.6227-3. Proposed
Sec. 301.6227-2(c).
One comment observed that it was unclear whether the references to
``an imputed underpayment'' in proposed Sec. 301.6227-2(a)(1) and to
``the imputed underpayment'' in proposed Sec. 301.6227-2(c) imply that
there can be only one imputed underpayment in an AAR, or whether more
than one imputed underpayment can be calculated in an AAR. The comment
recommended the regulations should clarify that a single AAR can result
in multiple imputed underpayments, some of which can be paid while
others are pushed out, and that adjustments that do not result in an
imputed underpayment can be pushed out.
Neither section 6227 nor the regulations thereunder prohibit a
partnership from filing multiple AARs for the same taxable year to
request multiple adjustments to partnership-related items. To allow the
IRS to respond to issues that arise in implementing the new partnership
audit regime, proposed Sec. 301.6227-1(c) required that an AAR must be
filed with the IRS in accordance with the forms, instructions, and
other guidance prescribed by the IRS. The current version of the form
prescribed by the IRS for filing an AAR is not designed to accommodate
the reporting of multiple imputed underpayments. A partnership may file
multiple AARs to allocate adjustments into separate imputed
underpayments. For example, the partnership may file one AAR reporting
an imputed underpayment that the partnership pays, while filing another
AAR reporting an imputed underpayment for which the partnership elects
to push out the adjustments associated with that imputed underpayment.
Accordingly, a partnership, by filing multiple AARs, can achieve the
result requested by the comment--that is, the ability to pay an imputed
underpayment with respect to certain adjustments and push out other
adjustments associated with a different imputed underpayment.
In response to the comment, the regulations have been revised to
refer to ``an'' or ``any'' imputed underpayment, as appropriate, to
accommodate future cases in which an AAR may result in more than one
imputed underpayment. In addition, Sec. Sec. 301.6227-2(c) and
301.6227-3(a) have been revised to clarify that in the case of an
election to have the reviewed year partners take into account the
adjustments in an AAR, such partners take into account only those
adjustments that are associated with the imputed underpayment to which
the election relates. Notwithstanding these revisions, the regulations
continue to refer to the form for filing an AAR and its instructions
for purposes of instructing how a partnership requests adjustments in
an AAR that result in an imputed underpayment.
C. Modifications Available in the Case of an AAR
Proposed Sec. 301.6227-2(a)(2) provided that a partnership may
apply modifications to the amount of the imputed underpayment
determined under proposed Sec. 301.6227-2(a)(1) using only certain,
enumerated modifications as described in proposed Sec. 301.6225-2 or
as provided in forms, instructions, or other guidance prescribed by the
IRS with respect to AARs. A partnership may not modify an imputed
underpayment resulting from adjustments requested in an AAR except as
described in proposed Sec. 301.6227-2(a)(2).
Proposed Sec. 301.6225-2(d)(10) provided a catch-all provision for
other modifications under which a partnership may request a
modification not described in proposed Sec. 301.6225-2(d), and the IRS
will determine whether such modification is accurate and appropriate.
Similarly, proposed Sec. 301.6225-2(d)(10) provided that additional
types of modifications, and the documentation necessary to substantiate
such modifications, may be set forth in forms, instructions, or other
guidance.
One comment suggested that the regulations should be more flexible
regarding the types of modifications that are allowed in the case of an
AAR. Specifically, the comment recommended that proposed Sec.
301.6227-2(a)(2) be revised to allow for the catch-all provision under
proposed Sec. 301.6225-2(d)(10) on the condition that the IRS approves
of the relevant modification upon review of the AAR. This comment was
not adopted.
Both proposed Sec. 301.6225-2(d)(10), in the context of an audit,
and proposed Sec. 301.6227-2(a)(2), in the context of an AAR, provide
that the IRS may set forth additional modifications in forms,
instructions, or other guidance. To the extent the comment was
recommending that adoption of the Sec. 301.6225-2(d)(10) catch-all
provision in Sec. 301.6227-2(a)(2) would allow the IRS to set forth
other modifications not specifically described in proposed Sec.
301.6227-2(a)(2), that ability is already provided for by the plain
language of Sec. 301.6227-2(a)(2).
To the extent the comment was recommending a rule in which a
partnership could request a
[[Page 6521]]
modification in an AAR on the condition that modification is only
allowed upon approval by the IRS, the comment was not adopted. The
final regulations adopt the rule that a partnership may not modify an
imputed underpayment resulting from adjustments requested in an AAR
except for the modifications described in proposed Sec. 301.6227-
2(a)(2). Under proposed Sec. 301.6227-2(a)(2)(i), the partnership is
not required to seek approval from the IRS prior to applying
modifications to the amount of any AAR imputed underpayment. This rule
permits a partnership to determine an imputed underpayment that results
from the adjustments requested in an AAR and apply modifications when
calculating the amount of the imputed underpayment the partnership
needs to pay when filing the AAR. The Treasury Department and the IRS
have determined that this procedure is more administrable for the IRS
and allows partnerships to more effectively file AARs and take any
adjustments into account. The partnership does not have to wait for an
IRS determination regarding specific modifications before determining
the amount of the imputed underpayment as modified, which would
significantly hamper the AAR process.
Because the partnership applies modifications prior to the IRS
reviewing and approving such modifications, the specifically enumerated
modifications in the regulations are limited to the types of
modifications for which the IRS already has procedures and systems in
place. This permits the IRS, when it reviews an AAR, to utilize those
procedures and systems to determine the accuracy and appropriateness of
the modification that was applied in the AAR. The limitation on the
types of modifications, in addition to the detailed information
required under Sec. 301.6227-2(a)(2)(ii), is designed to provide
partnerships the ability to reasonably modify an imputed underpayment
resulting from adjustments requested in an AAR while not creating undue
delay for the partnership and its partners to take the adjustments into
account. Also, by providing certainty regarding the permissible types
of modifications, a partnership will be able to efficiently use its
time and resources in determining whether it will pay an imputed
underpayment or elect to have its partners take into account the
adjustments. Finally, as the IRS gains more experience with
modifications in connection with an AAR under the centralized
partnership audit regime, Sec. 301.6227-2(a)(2) provides the ability
for the IRS to expand the set of allowed modifications through the use
of forms, instructions, or other guidance.
D. Partners Taking Into Account Adjustments Requested in an AAR
Former proposed Sec. 301.6227-3 included a reserved paragraph
regarding how a reviewed year partner that is a pass-through partner
takes into account its share of adjustments requested in an AAR. In
response to the June 2017 NRPM, one comment recommended that the
regulations should allow a pass-through partner to push out its share
of adjustments to the next tier of partners. The December 2017 NPRM
contained proposed rules under Sec. 301.6227-3 allowing for pass-
through partners to take into account adjustments requested in an AAR
by either making a payment or pushing out the adjustments to the next
tier of partners, similar to the rules under proposed Sec. 301.6226-
3(e). The rules under proposed Sec. 301.6227-3 were further revised in
the August 2018 NPRM to reflect the amendments by section 204 of the
TTCA and the corresponding changes to proposed Sec. 301.6226-3(e). See
section 5 of the preamble to the August 2018 NPRM. As a result, the
comment was adopted in the August 2018 NPRM and is also included in the
final regulations.
Example 2 under proposed Sec. 301.6227-3(b)(2), regarding how
partners other than pass-through partners take into account AAR
adjustments, was revised to remove the language indicating that the
partner may make a claim for refund with respect to the overpayment of
$25. Instead, the final regulations provide that the partner may make a
claim for refund with respect to ``any overpayment.'' Section 301.6227-
3(b)(1) provides that nothing in the rules under Sec. 301.6227-3
entitles any partner to a refund of chapter 1 tax to which such partner
is not entitled. Whether an overpayment exists is determined under
provisions of the Code and relevant case law outside the scope of these
regulations. Generally, an overpayment and the amount of a refund of an
overpayment cannot exceed the amount of tax paid. See section
6511(b)(2), Jones v. Liberty Glass, 332 U.S. 524, 531 (1947). No refund
or credit can be made unless it has first been determined that the
taxpayer has made an overpayment of tax for the period at issue. Lewis
v. Reynolds, 284 U.S. 281, 283 (1932).
Example 2 was also revised to clarify that the partner's chapter 1
tax for 2022 is -$25, that is, negative $25. This change conforms
Example 2 to the rules under Sec. 301.6226-3(b) which allow for the
additional reporting year tax to reduce a partner's chapter 1 tax for
the reporting year.
Finally, minor revisions were made to clarify that any adjustment
that does not result in an imputed underpayment is taken into account
by reviewed year partners.
E. Availability of Safe Harbor for Partners Taking Into Account
Adjustments
The June 2017 NPRM requested comments on whether the election to
pay a safe harbor amount under former proposed Sec. 301.6226-3 should
be available in the case of a partner that must take into account
adjustments requested in an AAR under proposed Sec. 301.6227-3. One
comment recommended that the regulations require a partnership filing
an AAR to calculate a safe harbor amount for each partner required to
take into account the adjustments requested in the AAR and include such
safe harbor amount in the statement furnished to the partner.
For the reasons discussed in section 4 of the preamble to the
December 2017 NPRM, the safe harbor amount was removed from the
regulations. No comments were received regarding its removal, and the
final regulations do not include a safe harbor amount. Accordingly,
this comment was not adopted.
F. Application of Section 905(c)
One comment recommended rules for how a partnership subject to the
centralized partnership audit regime can fulfill the requirements of
section 905(c), including the rules relating to the assessment and
collection of interest on certain refunds of creditable foreign taxes.
The final regulations under section 6227 do not provide rules regarding
the application of section 905(c), but do include a reserved paragraph
regarding notice of change to amounts of creditable foreign tax
expenditures. See Sec. 301.6227-1(g). The recommendations put forth by
the comment remain under consideration.
G. Partnerships That Have Elected Out of the Centralized Partnership
Audit Regime
One comment suggested that the regulations address how a
partnership that has a valid election under section 6221(b) in effect
for a particular taxable year should report changes to its original
partnership return from that year. Section 6227 is the mechanism for
partnerships that are subject to the centralized partnership audit
regime to file an AAR to correct errors on a partnership for a prior
year. A
[[Page 6522]]
partnership that has made a valid election under section 6221(b) in
accordance with Sec. 301.6221(b)-1 is not subject to such regime.
Accordingly, a partnership that has elected out of the centralized
partnership audit regime is not subject to section 6227 and therefore
does not file an AAR to correct errors on its original return. The
manner in which a partnership that has elected out should report
changes to its original return is outside the scope of these
regulations.
H. Whether an AAR Is Valid Without Statements
Proposed Sec. 301.6227-1(c)(2) provided that a valid AAR must
include the adjustments requested, the statements described in Sec.
301.6227-1(e) if a reviewed year partner is required to take into
account the adjustments requested, and other information prescribed by
the IRS in forms, instructions, or other guidance. The final
regulations clarify that in the case of a failure to provide the
information required under Sec. 301.6227-1(c)(2), the IRS may, but is
not required to, invalidate an AAR or readjust items that were adjusted
in the AAR.
Conversely, the word ``valid'' was added to Sec. 301.6227-2(b)(1)
to clarify that only a valid election under Sec. 301.6227-2(c) turns
off the partnership's obligation to pay an imputed underpayment
resulting from adjustments requested in an AAR.
I. Adjustments That Do Not Result in an Imputed Underpayment
Under Sec. 301.6225-1(f)(1), two situations occur where there may
be adjustments that do not result in an imputed underpayment. Under
Sec. 301.6225-1(f)(1)(i), a partnership adjustment does not result in
an imputed underpayment if the result of netting with respect to any
grouping or subgrouping that includes the particular partnership
adjustment is a net negative adjustment. Under Sec. 301.6225-
1(f)(1)(ii), a partnership adjustment does not result in an imputed
underpayment if the calculation under Sec. 301.6225-1(b)(1) resulted
in an amount that is zero or less than zero. Proposed Sec. 301.6227-
3(c)(2) provided rules regarding how a pass-through partner takes into
account adjustments that do not result in an imputed underpayment. The
proposed rule was unclear as to whether the rule applied to both types
of situations. The final regulations under Sec. 301.6227-3(c)(2)
clarify that a pass-through partner must take into account AAR
adjustments that, with respect to that pass-through partner, do not
result in an imputed underpayment by furnishing statements to its
affected partners. This rule applies to both adjustments that do not
result in an imputed underpayment pursuant to Sec. 301.6225-1(f)(1)(i)
and adjustments that do not result in an imputed underpayment pursuant
to Sec. 301.6225-1(f)(1)(ii). This rule also applies in situations
where the pass-through partner pays an imputed underpayment. The final
regulations under Sec. 301.6227-1(e)(2) additionally clarify that when
a partnership pays an imputed underpayment and there are adjustments
that did not result in that imputed underpayment pursuant to Sec.
301.6225-1(f)(1)(i), only the adjustments that did not result in an
imputed underpayment are to be included in the statements to its
affected partners.
J. Interest With Respect to an Imputed Underpayment Resulting From AAR
Adjustments
Proposed Sec. 301.6227-2(b)(2) provided that interest on an
imputed underpayment resulting from adjustments requested in an AAR is
determined under chapter 67 of the Code for the period beginning on the
date after the due date of the partnership return for the reviewed year
(determined without regard to extension) and ending on the earlier of
the date payment of the imputed underpayment is made, or the due date
of the partnership return for the adjustment year. 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). Proposed Sec. 301.6227-2(b)(2).
To conform the rules under proposed Sec. 301.6227-2(b)(2) with the
rules under proposed Sec. Sec. 301.6232-1(b), 301.6233(a)-1(b), and
301.6233(b)-1(c), the final regulations provide that interest on an
imputed underpayment resulting from adjustments requested in an AAR
ends on the date the AAR is filed. In the case of any failure to pay an
imputed underpayment on the date the AAR is filed, interest is
determined in accordance with section 6233(b)(2) and Sec. 301.6233(b)-
1(c).
6. Notices of Proceedings and Adjustments
Former proposed Sec. 301.6231-1(b)(1) provided that a notice of
proposed partnership adjustment (NOPPA) is timely if it is mailed
before the expiration of the period for making adjustments under
section 6235(a)(1), including any extensions of that period under
section 6235(b) and after applying any of the special rules in section
6235(c). After former proposed Sec. 301.6231-1(b)(1) was issued,
section 206(h) of the TTCA amended section 6231(b) to provide that a
NOPPA shall not be mailed later than the date determined under section
6235(a)(1). Prior to this amendment, the statute did not limit the
period for the IRS to propose adjustments under the centralized
partnership audit regime. Because former proposed Sec. 301.6231-1
comported with the TTCA amendments to section 6231, former proposed
Sec. 301.6231-1 was not revised when the regulations were re-proposed
in the August 2018 NPRM.
One comment received prior to the issuance of former proposed Sec.
301.6231-1 and before the TTCA amendments to section 6231(b)
recommended that the regulations clarify that a NOPPA must be issued
within the three-year period specified in section 6235(a)(1). Because
the statute and the plain language of proposed Sec. 301.6231-1 reflect
the rule suggested by this comment, the final regulations adopt the
language of the proposed regulations without change.
Section 6227(c) provides that a partnership has three years from
the later of the filing of the partnership return or the due date of
the partnership return (excluding extensions) to file an AAR for a
taxable year. However, a partnership may not file an AAR for a
partnership taxable year after the IRS has mailed a NAP under section
6231 with respect to that taxable year. Section 6227(c); Sec.
301.6227-1(b). Proposed Sec. 301.6231-1(f) provided that the IRS may,
without consent of the partnership, withdraw any NAP or NOPPA, and any
NAP or NOPPA that has been withdrawn by the IRS has no effect for
purposes of subchapter C of chapter 63. If the IRS withdraws a NAP with
respect to a partnership taxable year under proposed Sec. 301.6231-
1(f), 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.
One comment stated that the rule under proposed Sec. 301.6231-1(f)
lifting the prohibition on filing an AAR after a NAP is meaningless if
the three-year period of limitations under section 6227(c) to file an
AAR has already expired. The comment suggested that the language in
proposed Sec. 301.6231-1(f) be revised to provide that a NAP that has
been withdrawn by the IRS has no effect for purposes of subchapter C or
chapter 63 ``except for suspension of the period of limitations under
section 6227 as provided in Sec. 301.6227-1(b).'' The comment
suggested a corresponding change to proposed Sec. 301.6227-1(b) to
provide that the
[[Page 6523]]
period of limitations for filing an AAR is suspended while a NAP is
outstanding. These suggestions have not been adopted.
First, section 6227 does not authorize the Treasury Department or
the IRS to suspend the period of limitations within which a partnership
may file an AAR. By way of contrast, other statutory provisions within
subchapter C of chapter 63, such as section 6235(b) and section
6225(c)(7), do provide authority for the IRS to extend certain time
periods. The absence of similar authority in section 6227 indicates the
IRS does not have the authority to suspend the period of limitations
under section 6227(c).
Moreover, because of the required timing of an examination under
the centralized partnership audit regime, it is likely that in many
cases when a NAP is withdrawn, there will still be time left on the
period of limitations to file a timely AAR. In order for a NOPPA to be
timely mailed, it generally must be issued within three years of the
date on which the partnership return for such taxable year was filed or
the return due date for the taxable year. Section 6235(a)(1). To allow
for sufficient time to examine the partnership taxable year and to mail
a timely NOPPA, the IRS will normally mail the NAP early on in that
three-year period.
The period for filing a timely AAR under section 6227(c) runs
concurrently with the three-year period for mailing a NOPPA. If after
the issuance of the NAP a partnership finds that it agrees with the
adjustments the IRS has raised with the partnership during the
examination, the partnership may also find that it is more efficient
for both the partnership and the IRS to file an AAR, rather than have
those adjustments be made in the context of the partnership-level exam.
In such a case, the partnership may inform the IRS of its desire to
file an AAR, and the IRS can determine whether it is appropriate, in
the view of the IRS, to withdraw the NAP in light of all of the facts
and circumstances. It is incumbent upon the partnership to inform the
IRS of its desire to file an AAR at the earliest possible point in the
exam to ensure the NAP can be withdrawn with sufficient time in the
section 6227(c) period to file an AAR.
Proposed Sec. 301.6231-1(f) provided that a NAP that has been
withdrawn by the IRS has no effect for purposes of subchapter C of
chapter 63. Under Sec. 301.6223-1(d)(2) and (e)(2), however, if the
IRS withdraws a NAP pursuant to Sec. 301.6231-1(f), any valid
resignation or revocation of a partnership representative designation
or designated individual appointment prior to the withdrawal of the NAP
remains in effect. To conform these two sets of rules, the final
regulations under Sec. 301.6231-1(f) clarify that a withdrawn NAP has
no effect for purposes of subchapter C of chapter 63 except as
described in Sec. 301.6223-1(d)(2) and (e)(2).
In addition, proposed Sec. 301.6231-1(f) was revised to clarify
that if the IRS withdraws a NAP or NOPPA, the NAP or NOPPA is treated
as if it were never issued, in addition to the NAP or NOPPA not having
any effect for purposes of subchapter C of chapter 63. This change
conforms the language of the final regulations under Sec. 301.6231-
1(f) more closely with the language of section 6227(c).
Lastly, the final regulations under Sec. 301.6231-1(f) clarify
that the withdrawal of a NAP or NOPPA obviates the limitation under
Sec. 301.6222-1(c)(5) providing that a partner may not treat an item
inconsistently after a NAP has been mailed with respect to a
partnership taxable year. This change clarifies that if the IRS
withdraws a NAP, a partner may treat an item inconsistently from how
the item was treated on the partnership return after the withdrawal of
the NAP.
7. Assessment, Collection, and Payment of Imputed Underpayments
Proposed Sec. 301.6232-1(d)(1)(i) provided that 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 to comply with section 6222(a), the IRS has
adjusted or will adjust partnership-related items to correct the error
or to make the items consistent under section 6222(a) and has assessed
or will assess any imputed underpayment 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, and the limitations under proposed Sec. 301.6232-1(c)
(providing that generally no assessment can be made before the mailing
of an FPA or, if applicable, a final court decision) do not apply to an
assessment under Sec. 301.6232-1(d)(1)(i). A partnership generally may
request abatement of such assessments, but abatement is not available
where an adjustment that is the subject of a notice described in
proposed Sec. 301.6232-1(d)(1)(i) is due to the failure of a
partnership-partner to comply with section 6222(a). Proposed Sec.
301.6232-1(d)(1)(ii).
One comment recommended that the regulations include a statement
that the assessment procedures under Sec. 301.6232-1(d)(1)(i) will be
narrowly construed and applied. The comment suggested as an example
that the regulations make clear that an assessment against a partner of
a partnership-partner will not be treated as a mathematical or clerical
error where the partner has reported the items at issue consistently
with the partnership-partner, even though the partnership-partner may
not have been consistent with the partnership in which it is a partner.
These suggestions were not adopted.
Nothing in the statute indicates that section 6232(d) should be
construed or applied to a particular degree. More specifically, a rule
providing that section 6232(d) will be applied and construed narrowly
would be vague and not give helpful guidance to taxpayers or the IRS.
For these reasons, the comment's suggestion regarding construing and
applying section 6232(d) narrowly was not adopted, and the regulations
do not include a statement to that effect.
Regarding the comment's example of a rule that might reflect a
narrow construction of the regulations, this suggestion was also not
adopted. Proposed Sec. 301.6232-1(d)(1)(iii) provided that in the case
of a partnership-partner that has an election under section 6221(b) in
effect, 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 of the partnership-partner (or
indirect partners of the partnership-partner). 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. Proposed
Sec. 301.6232-1(d)(1)(iii). For all other partnership-partners, the
IRS may assess an imputed underpayment against such partnership-partner
on account of a failure to meet the consistency requirements under
section 6222(a). See Sec. 301.6232-1(d)(1)(i). The rule suggested by
the comment thus would apply in the case of partnership-partners that
have an election under section 6221(b) in effect and that fail to meet
the requirements of section 6222(a).
Section 6232(d) provides that any adjustment on account of a
failure of a partnership that is a partner in another partnership to
meet the requirements of section 6222(a) shall be treated as an
adjustment based on mathematical or
[[Page 6524]]
clerical error, and rules similar to those under section 6213(b)(1)
shall apply. In the case of partnership-partners that have an election
in effect under section 6221(b), sections 6213 and 6232 allow the IRS
to assess tax against the partners of such partnership-partner, without
providing for a method to seek abatement of that assessment. Section
6232(d)(1)(B) provides that any adjustment on account of a failure by a
partnership-partner to meet the consistency requirements under section
6222(a) is treated as an adjustment due to a mathematical or clerical
error. Accordingly, an assessment that follows any adjustment to the
partnership-partner's return pursuant to section 6232(d) is not subject
to the prohibition under section 6213(a), which would otherwise require
a notice of deficiency to be mailed to the taxpayer. Additionally,
section 6232(d)(1)(B) explicitly provides that the provisions under
section 6213(b)(2), permitting abatement of such assessment, do not
apply. Therefore, the IRS may assess tax against the partners of a
partnership-partner where the partnership-partner reported
inconsistently and has an election in effect under section 6221(b)
without first having to issue a notice of deficiency to the partner,
and abatement of the assessment under section 6213(b)(2) is not
available. Accordingly, no changes were made in response to this
comment.
The same comment also suggested that the regulations explain how a
taxpayer may properly challenge a mathematical or clerical error
assessment made by the IRS under proposed Sec. 301.6232-(d)(1)(ii)(B)
where the normal abatement procedures are unavailable. This comment was
not adopted.
In the case where an imputed underpayment has been assessed
pursuant to Sec. 301.6232-(d)(1)(ii)(B) against a partnership-partner
that has not complied with section 6222(a), the partnership-partner may
be able to file an AAR subsequent to that assessment in accordance with
the provisions of sections 6222 and 6227. While the AAR may readjust
the partnership-related items at issue which resulted in the imputed
underpayment, in effect providing an opportunity to the partnership to
contest the adjustments, such readjustments would be required to be
taken into account by the partnership's partners pursuant to the rules
under section 6227 because the readjustments would necessarily be
adjustments that would not result in an imputed underpayment. See
Sec. Sec. 301.6227-1(a), 301.6227-3(a). Those readjustments may reduce
the partner's tax in the reporting year, but nothing would give the
partnership-partner the ability to claim a refund of any imputed
underpayment paid. Accordingly, it is the burden of a partnership-
partner to ensure it has complied with the provisions of section
6222(a), either by treating items consistently with the manner in which
they are treated on the partnership return or by notifying the IRS of
any inconsistency, in order to preclude an assessment of an imputed
underpayment under section 6232(d)(1)(B).
Under Sec. 301.6232-(d)(1)(ii)(B), a partnership-partner that has
failed to comply with section 6222(a) may, prior to assessment, correct
an inconsistency by filing an AAR under section 6227 or filing an
amended partnership return and furnishing amended statements, as
appropriate. To clarify that an AAR in such a situation is only
permitted to the extent allowed under section 6227, including the
timing restrictions under section 6227(c), the final regulations under
Sec. 301.6232-(d)(1)(ii)(B) provide that the partnership may file an
AAR ``in accordance with'' section 6227.
In the situation where an imputed underpayment has been assessed
pursuant to Sec. 301.6232-(d)(1)(ii)(B) against a partnership-partner
but such partnership-partner had in fact complied with the provisions
of section 6222(a), the partnership may be able to seek a refund of the
any imputed underpayment paid on the ground that the adjustment should
not have been treated as being on account of mathematical or clerical
error. Any ability to seek a refund in this situation, however, is
outside the scope of these regulations. For these reasons, no changes
were made to the regulations under Sec. 301.6232-1(d) in response to
this comment.
8. Interest and Penalties Related to Imputed Underpayments
Proposed Sec. 301.6233(a)-1(a) provided that except to the extent
provided in section 6226(c) and the regulations thereunder, in the case
of a partnership adjustment for a reviewed year, a partnership is
liable for interest and for any penalty, addition to tax, or additional
amount as provided in proposed Sec. 301.6233(a)-1(c). Proposed Sec.
301.6233(a)-1(c)(1) provided that in accordance with section 6221(a),
the applicability of any penalties, additions to tax, and additional
amounts that relate to a partnership adjustment is determined at the
partnership level as if the partnership had been an individual subject
to tax imposed by chapter 1 of the Code for the reviewed year, and the
imputed underpayment were an actual underpayment of tax or
understatement for such year. Proposed Sec. 301.6233(a)-1(c)(2)
provided rules that apply in the case of penalties imposed under
sections 6662, 6662A, and 6663 with respect to partnership adjustments.
A. Defenses to Penalties
Proposed Sec. 301.6233(a)-1(c)(1) provided that a partner-level
defense (as described in Sec. 301.6226-3(d)(3)) may not be raised in a
proceeding of the partnership. As discussed in section 4.C.ii.I of this
preamble, one comment recommended that the regulations clarify that a
partnership that makes a push-out election will be able to avail itself
of partner-level defenses at the partnership level. Another comment
recommended that the regulations should provide a mechanism for
partners to raise partner-level defenses prior to assessment, rather
than requiring the partner to first pay the penalty and then file a
claim for refund to raise the partner-level defense. The comment stated
the post-payment process would be unduly burdensome on partners and
that a pre-payment process would not impair the audit process for the
IRS. These comments were not adopted.
Section 6233 provides that penalties are determined as if the
partnership had been an individual subject to chapter 1 tax for the
reviewed year. In determining whether a penalty applies during the
partnership proceeding, therefore, it is only the conduct of the
partnership that is relevant. Allowing the partnership or partners to
raise partner-level defenses and requiring the IRS to evaluate a
partner's facts and circumstances during the partnership proceeding
contravenes that purpose of the centralized partnership audit regime.
Such a rule would also significantly impair the IRS's audit process. As
discussed in section 3 of this preamble regarding the determination of
imputed underpayments, an examination under the centralized partnership
audit regime is a centralized proceeding wherein partner tax attributes
are generally unaccounted for. Requiring the IRS to evaluate the
specific facts and circumstances of each partner undermines the
centralized nature of the proceeding and could significantly delay the
examination.
Moreover, section 6233 treats an imputed underpayment as if it were
an actual underpayment or understatement for the reviewed year. A
partner-level defense by itself cannot reduce the amount of an imputed
underpayment. Even if the partner-level defense were sufficient to
provide penalty relief, that
[[Page 6525]]
relief does not affect the amount of the imputed underpayment. A
partner-level defense can only be relevant in situations where the
imputed underpayment is reduced because a partner takes into account
the adjustments that resulted in the imputed underpayment, for example
as part of modification, or where there is no partnership-level
liability for the imputed underpayment because of an election by the
partnership under section 6226 to have its partners take into account
the adjustments. Only upon taking into account the adjustments will a
partner know the amount of the penalty the partner is liable for and
therefore whether a defense to the penalty is needed. Accordingly,
comments suggesting that the partnership be permitted to raise partner-
level defenses to reduce a penalty imposed against the partnership were
not adopted. For discussion of partner-level defenses in the context of
modification and the push out election, see sections 3.C and 4.C.ii.I
of this preamble.
B. Determining the Portion of the Imputed Underpayment to Which the
Penalty Applies
Proposed Sec. 301.6233(a)-1(c)(2)(ii) provided rules for
determining the portion of the imputed underpayment to which a penalty
applies where there exists (1) 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) at least two
adjustments with respect to which penalties have been imposed and the
penalties have different rates. In general, to determine the portion of
the imputed underpayment to which the penalty applies, all partnership
adjustments that resulted in the imputed underpayment were grouped
together according to whether they were adjustments with respect to
which a penalty has been imposed and according to rate of penalty. The
adjustments were then multiplied by the rate that applied in
calculating the imputed underpayment and added together to produce the
portion of the imputed underpayment to which the penalty applies.
One comment observed that under proposed Sec. 301.6233(a)-
1(c)(2)(ii)(D) and (E) negative or decreasing adjustments were applied
first to adjustments to which no penalties have been imposed and then
to adjustments subject to the lowest penalty and suggested that this
rule applies such adjustments in a manner that maximizes penalties. The
comment recommended that the proposed regulations be revised to group
adjustments by character for purposes of calculating the portion of the
imputed underpayment subject to the penalty. This comment was partially
adopted.
Section 6233(a)(3) provides that any penalty, addition to tax, or
additional amount shall be determined at the partnership level as if
such partnership had been an individual subject to tax under chapter 1
for the reviewed year and the imputed underpayment were an actual
underpayment (or understatement) for such year. Section 6662, which
imposes accuracy-related penalties on underpayments, applies to the
portion of an underpayment attributable to certain circumstances such
as negligence or disregard of rules or regulations or a substantial
understatement of income tax. To determine the portion of an imputed
underpayment to which a penalty applied, proposed Sec. 301.6233(a)-
1(c) applied rules similar to the ordering rules under Sec. 1.6664-3
by disregarding the grouping and subgrouping rules under Sec.
301.6225-1 and by applying decreasing adjustments to offset any
positive adjustments to which no penalty was imposed, followed by
adjustments to which 20 a percent penalty was imposed, and so forth.
While the rules under proposed Sec. 301.6233(a)-1(c) were consistent
with the rules Sec. 1.6664-3, this consistency did not allow for
important distinctions between the calculation of an underpayment and
the calculation of the imputed underpayment. For example, in computing
an imputed underpayment, negative adjustments are generally not taken
into consideration in determining the imputed underpayment unless the
negative adjustment is in a grouping or subgrouping under Sec.
301.6225-1 that results in a net positive adjustments because only net
positive adjustments are totaled to determine the total netted
partnership adjustment, which forms the base for an imputed
underpayment prior to application of any adjustments to credits.
Section 301.6233(a)-1(c) has been revised to account for these
distinctions and to apply the ordering rules under Sec. 1.6664-3
within each grouping or subgrouping determined in accordance with Sec.
301.6225-1. Because the revised rule uses the groupings and
subgroupings determined under section 6225, in general the character of
the adjustments within each grouping will be the same, as suggested by
the comment. See Sec. 301.6225-1(d). The revised rule maintains the
treatment of an imputed underpayment as if it were an actual
underpayment or understatement, but also respects the framework for
calculating the imputed underpayment established under section 6225 and
the regulations thereunder. The revised rule is also more streamlined,
removes references to specific penalty rates to allow for any future
statutory changes, and eliminates unnecessary steps and terminology.
For example, the revised rule eliminates the term decreasing adjustment
and instead uses the term ``negative adjustment'' as defined in Sec.
301.6225-1(d)(2).
Section 301.6233(a)-1(c)(2) provides the rules for calculating
penalties under section 6662, 6662A or 6663. Section 301.6233(a)-
1(c)(2)(iii) provides the rules for applying negative adjustments. As a
threshold matter, the rule provides that adjustments that do not result
in an imputed underpayment and adjustments that are disregarded in
determining the imputed underpayment are not taken into account when
determining the amount of penalties. The rule generally provides that
if any grouping or subgrouping as determined under Sec. 301.6225-1 or
Sec. 301.6225-2 contains a negative adjustment and at least one
positive adjustment subject to penalty, the negative adjustment is
first used to offset any positive adjustment to which no penalties have
been imposed within that grouping or subgrouping. If any amount of
negative adjustments remains after offsetting positive adjustments to
which no penalties have been imposed, the remaining amount of negative
adjustment is applied within the grouping or subgrouping against
positive adjustments to which a penalty has been imposed at the lowest
rate. If after this step, any amount of negative adjustment remains,
the process is repeated iteratively with respect to higher rates in
ascending order of rate. Additionally, the regulations provide special
rules for the application of negative credits. All adjustments to
credits and adjustments treated as adjustments to credits are treated
as grouped in the credit grouping without regard to whether the
adjustments were subgrouped for purposes of Sec. 301.6225-1 (or Sec.
301.6225-2 in the case of modification). If negative credit adjustments
remain after the application of negative adjustments in accordance with
Sec. 301.6233(a)-1(c)(2)(iii)(A), negative credit amounts are first
applied to reduce the portion of the imputed understatement not subject
to penalty then to reduce the portion of the imputed understatement
subject to penalty iteratively in ascending order of rate.
Section 301.6233(a)-1(c)(2)(ii) provides the mechanical steps for
calculating any penalty after any
[[Page 6526]]
negative adjustments have been applied in accordance with 301.6233(a)-
1(c)(2)(iii). The steps are applied separately for each particular
penalty imposed with respect to the adjustments.
First, all adjustments that are not adjustments to credits or
treated as adjustments to credits that are subject to a particular
penalty and to which the highest rate of tax in effect for the reviewed
year under section 1 or 11 was applied are totaled. Second, the total
from step one is multiplied by the highest rate of tax in effect for
the reviewed year under section 1 or 11. Third, the first and second
steps are repeated for any other tax rates used to calculate the
imputed underpayment, for example, rates applied as part of the
modification process. Fourth, all of the results from completing the
first three steps are totaled. Fifth, all adjustments in the credit
grouping are netted. The total from step four is increased by any
remaining positive adjustments to credits or decreased by negative
adjustments to credits in accordance with the rules in Sec.
301.6233(a)-1(c)(2)(iii). This result is the portion of the imputed
underpayment subject to penalty. Sixth, the total from step five is
multiplied by the penalty rate for the penalty to provide the total
penalty amount.
C. Interest on Penalties, Additions to Tax, and Additional Amounts
As discussed earlier in section 4.C.ii.III. of this preamble, one
comment recommended that the regulations adopt a bifurcated approach
under which interest would run on tax from the due date of the return
without regard to extensions while interest on penalties would run from
the due date of the return including any extensions. The comment
recommended that proposed Sec. 301.6233(a)-1(b) be revised to provide
that the interest imposed on penalties and additions to tax (other than
assessable penalties) on an imputed underpayment begins on the day
after the due date of the partnership return (including any
extensions). This comment was partially adopted.
Proposed Sec. 301.6233(a)-1(b) provided rules regarding interest
on an imputed underpayment, but did not provide rules regarding
interest on penalties, additions to tax, or additional amounts with
respect to the imputed underpayment. In light of the comment, the final
regulations under Sec. 301.6233(a)-1(b) clarify that interest with
respect to penalties, additions to tax, or additional amounts with
respect to an imputed underpayment determined under the rules of Sec.
301.6233(a)-1(c) is the interest that would be imposed under chapter 67
of the Code treating the partnership return for the reviewed year as
the return of tax to with respect to which such penalty is imposed. To
the extent the comment was suggesting a rule that is not consistent
with chapter 67 of the Code, the comment was not adopted.
9. Judicial Review of Partnership Adjustments
Section 6234(a) provides that a partnership may file a petition in
the Tax Court, a United States district court, or the Court of Federal
Claims, within 90 days of the date on which an FPA is mailed under
section 6231. A petition under section 6234 may be filed in a district
court or the Court of Federal Claims only if the partnership filing the
petition makes a jurisdictional deposit in accordance with section
6234(b). The jurisdictional deposit is 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. See proposed Sec. 301.6234-1(b).
Under proposed Sec. 301.6226-1(e), a partnership that has made an
election under Sec. 301.6226-1 is not precluded from filing a petition
under section 6234(a). One comment stated that the proposed regulations
provided no explanation as to how or whether the deposit amount under
section 6234(b) may or should be adjusted to reflect a push out
election under section 6226. The comment recommended the regulations
should provide a mechanism that would enable a partnership to file a
petition in a district court or Court of Federal Claims and still make
an election under section 6226, without creating the risk of having tax
on the partnership adjustments paid twice. The comment suggested that
one possible approach might be to reduce the deposit amount by the
amount that would be reported by partners that receive statements based
on an election under section 6226. The comment suggested that another
approach might be to provide a clear mechanism for having the
partnership obtain a refund of the imputed tax deposit before any
amounts are paid by the push out partners under section 6226.
The comment's suggestion regarding whether a partnership can make
an election under section 6226 and also file a petition under section
6234 is addressed in section 4.A.v of this preamble. With respect to
the comment's suggestion that the partnership deposit be reduced by the
amount of the imputed underpayment that would be reported by partners
that receive 6226 statements, this suggestion was not adopted. The
plain language of section 6234(b)(1) makes clear that a petition for
readjustment may be filed in district court or the Court of Federal
Claims only if the partnership makes a jurisdictional deposit. The
statute does not provide authority to alter this jurisdictional
requirement by regulation for any partnerships, including partnerships
that make the election under section 6226. The election under section
6226 is made with respect to an imputed underpayment, and therefore the
deposit required under section 6234(b)(1) must equal the entire imputed
underpayment to which the election relates (in addition to penalties
and interest). An election under section 6226 is not with respect to a
portion of an imputed underpayment; likewise, a deposit under section
6234(b)(1) cannot be for a portion of the imputed underpayment.
Moreover, a rule allowing for a reduction in the deposit amount for
those partners that are furnished statements under section 6226 would
not work as a practical matter. First, to the extent the comment was
suggesting a rule that allows a reduction of the deposit equal to each
partner's share of the adjustments, this rule would reduce the deposit
amount to zero, provided all partners properly were furnished
statements. This would effectively eliminate the deposit requirement
for partnerships making an election under section 6226. There is
nothing in the statute that allows any partnership, including a
partnership making the election under section 6226, to be exempt from
the jurisdictional requirements of section 6234(b).
Second, to the extent the comment was suggesting a rule that would
reduce the deposit by the tax paid by partners furnished statements,
this rule would also not work given the timing of when statements must
be furnished. Pursuant to Sec. 301.6226-2(b)(1), all statements must
be furnished no later than 60 days after the date all of the
partnership adjustments to which the statement relates are finally
determined. Partnership adjustments are finally determined upon the
later of the expiration of the time to file a petition under section
6234, or if a petition under section 6234 is filed, the date when the
court's decision becomes final. The deposit under section 6234(b)(1)
must be made when a petition is filed. The deposit cannot be reduced at
the time by the amount the tax partners will pay because statements are
not furnished until later in the
[[Page 6527]]
process and even then the tax is not known until the partner files its
return for the reporting year, which depending on timing of the FPA
could be more than a year after the deadline for petitioning a court
under section 6234(a). For these reasons, the comment's suggestion
regarding a reduction in the amount of the deposit were not adopted,
and the regulations were not changed in response to those suggestions.
With respect to the comment's recommendation that there be a clear
mechanism for having the partnership obtain a refund of the tax
deposit, the comment's concern that the deposit made in conjunction
with a section 6226 election would result in double taxation is
misplaced; however, the regulations were revised to clarify operation
of the deposit rules. Under Sec. 301.6234-1(c), the amount deposited
under section 6234(b)(1) is not treated as a payment of tax (except
with respect to chapter 67 of the Code). If the partnership makes a
valid election under section 6226, no amount may be assessed against
the partnership, and instead the partners must take the adjustments
into account. To conform these two sets of rules, the final regulations
under Sec. 301.6234-1(e) clarify that a partnership is entitled to a
return of any deposit that is in an amount in excess of the amount
assessed against the partnership. To obtain a return of this excess
deposit, the partnership must notify the IRS in writing in accordance
with forms, instructions, and other guidance prescribed by the IRS.
10. Definitions and Special Rules
Five comments were received regarding the definition of pass-
through partner under proposed Sec. 301.6241-1, the rules regarding
cease to exist determinations in accordance with proposed Sec.
301.6241-3, and the rules regarding the nondeductibility of payments
made under the centralized partnership audit regime as provided in
proposed Sec. 301.6241-4.
A. Definitions
Proposed Sec. 301.6241-1 defined certain terms for purposes of the
centralized partnership audit regime. Proposed Sec. 301.6241(a)(5)
defined a ``pass-through partner'' as ``a pass-through entity that
holds an interest in a partnership'' and a ``pass-through entity'' to
include a partnership described in Sec. 301.7701-2(c)(1), among other
types of entities. A partnership as described in Sec. 301.7701-2(c)(1)
means a business entity that is not a corporation under Sec. 301.7701-
2(b) and that has at least two members.
Section 6241(1) defines the term partnership to mean any
partnership required to file a return under section 6031(a), which
applies to every partnership as defined in section 761(a). Certain
unincorporated organizations may elect under section 761(a) to not be
subject to subchapter K. Proposed Sec. 301.6241-5(a) provided that an
entity that files a partnership return for any taxable year is subject
to the centralized partnership audit regime with respect to such
taxable year even if it is determined that the person filing the
partnership return was not a partnership for such taxable year.
Proposed Sec. 301.6241-5(c)(2) provided an exception from this rule
for entities for which a partnership return was filed for the sole
purpose of making the election described in section 761(a).
One comment suggested there was an inconsistency between the
definition of ``pass-through partner'' under proposed Sec. 301.6241-
1(a)(5), which defines partnership by reference to Sec. 301.7701-
2(c)(1), and the exception under proposed Sec. 301.6241-5(c)(2) for
entities that have elected out of subchapter K. The comment observed
that the definition of partnership under Sec. 301.7701-2(c)(1)
arguably includes business organizations that have elected out of
subchapter K under section 761(a). As a result, the term ``pass-through
partner'' would include entities that may not be partnerships within
the meaning of section 6031(a) because those entities are required to
file partnership returns. To remedy this inconsistency, the comment
recommended that the definition of ``pass-through partner'' in proposed
Sec. 301.6241-1(a)(5) be revised to eliminate the reference to Sec.
301.7701-2(c)(1) and instead refer to the definition of ``partnership''
under section 6241(1), that is, ``a partnership required to file a
return under section 6031(a).''
The Treasury Department and the IRS agree with the comment that
there was an inconsistency in the definition of ``pass-through
partner.'' The approach recommended in the comment was adopted and
remedied this inconsistency. The revision clarifies that business
organizations that have elected out of subchapter K are not ``pass-
through partners.'' This change is consistent with the definition of
``partnership'' under section 6241(1). Accordingly, the definition of
``pass-through partner'' under Sec. 301.6241-1(a)(5) refers to a
partnership that is required to file a return under section 6031(a),
consistent with the definition of partnership under section 6241(1).
One comment was received regarding the application of the
centralized partnership audit regime to pass-through partners as a
result of the proposed regulations. Proposed Sec. 301.6226-3 provided
that a pass-through partner that is furnished a statement described in
Sec. 301.6226-2 must comply with proposed Sec. 301.6226-3(e). The
term ``pass-through partner'' includes partnerships that made an
election under section 6221(b) for the taxable year. One comment
suggested that there may be uncertainty with respect to how a
partnership that has elected out of the centralized partnership audit
regime complies with the requirements of the regime. For example, the
elected out partnership may not have designated a partnership
representative prior to receiving a statement described in Sec.
301.6226-2. The comment recommended that the Treasury Department and
the IRS should issue further guidance on elected out partnerships,
including providing guidance that confirms an elected out partnership
receiving a statement described in Sec. 301.6226-2 and complying with
Sec. 301.6226-3(e) will not be deemed subject to the centralized
partnership audit regime for other purposes.
A partnership that has made an election under section 6221(b) is
not subject to the requirements of the centralized partnership audit
regime as a partnership. For example, the partnership is not required
to select a partnership representative. A partnership that has made an
election under section 6221(b) may still be subject to the requirements
of the centralized partnership audit regime in its capacity as a
partner in a partnership that is subject to the centralized partnership
audit regime. For example, sections 6222, 6223, 6226(b)(4)(C), 6241(7),
and the regulations thereunder apply to all partners in a partnership
subject to the centralized partnership audit regime, including any
pass-through partner. Pass-through partners that must comply with these
provisions include partnerships subject to the centralized partnership
audit regime as partnerships as well as those that made an election
under 6221(b) and other entities such as S corporations and trusts.
For example, under Sec. 301.6226-3(e) a pass-through partner that
receives a push out statement from an audited partnership must furnish
statements to its owners or, if it fails to furnish statements to its
owners, pay an imputed underpayment. This rule applies regardless of
whether or not the pass-through partner is subject to the
[[Page 6528]]
centralized partnership audit regime in its capacity as a partnership.
Nothing in proposed Sec. 301.6226-3(e) indicated that a pass-through
partner not otherwise subject to the centralized partnership audit
regime becomes subject to other provisions of the regime simply because
it must comply with Sec. 301.6226-3(e) in its capacity as a partner.
Therefore, the Treasury Department and the IRS have declined to provide
further guidance regarding the application of the centralized
partnership audit regime to partnerships that have made an election out
of the centralized partnership audit regime under section 6221(b).
B. Treatment Where a Partnership Ceases To Exist
Several comments were received regarding the treatment of
partnership adjustments where a partnership ceases to exist under
section 6241(7). The comments pertained to two general areas: (1) The
determination that a partnership has ceased to exist; and (2) the
definition of ``former partners'' under proposed Sec. 301.6241-3(d).
i. Determination That Partnership Has Ceased To Exist
Proposed Sec. 301.6241-3 provided that, if the IRS determined a
partnership ceased to exist (as described in proposed Sec. 301.6241-
3(b)(2)) before the partnership adjustments take effect (as described
in proposed Sec. 301.6241-3(c)), the partnership adjustments are taken
into account by the former partners (as described in proposed Sec.
301.6241-3(d)) in accordance with proposed Sec. 301.6241-3(e).
Proposed Sec. 301.6241-3(b)(1) provided that a determination that a
partnership had ceased to exist was within the sole discretion of the
IRS, and the IRS was not required to determine that a partnership has
ceased to exist, even if the partnership meets the definition of cease
to exist in proposed Sec. 301.6241-3(b)(2).
One comment stated that the language in proposed Sec. 301.6241-
3(b)(1) and (2) was ambiguous and allowed for excessive latitude and a
potential for abuse of discretion in making such a cease-to-exist
determination. The comment suggested that the IRS, upon formal request,
should be compelled to consider the facts and circumstances of a cease-
to-exist determination.
If the IRS receives a letter requesting that the IRS determine that
a specific partnership has ceased to exist and providing detailed facts
to support such a determination, the IRS will consider the
circumstances in the letter and whether it is in the interest of sound
tax administration to determine that the partnership has ceased to
exist. The IRS, however, will retain its discretion as to whether to
determine that a partnership has ceased to exist, even if the facts
would indicate that the partnership meets the criteria in Sec.
301.6241-3(b)(1)(i) and (ii). The cease-to-exist rules are inherently
related to collection issues with respect to amounts not paid as a
result of an administrative proceeding under the centralized
partnership audit regime. Where a taxpayer or partnership properly owes
amounts to the U.S. government, the IRS should be provided broad
latitude, within the statutory limits, to ensure that such amounts are
ultimately collected. To that end, it is administratively necessary for
the IRS to retain its discretion to make a determination about whether
a partnership ceases to exist. Cease to exist is not the only
collection tool available to the IRS. The Treasury Department and the
IRS therefore decline to create an additional unnecessary
administrative rule that would compel the IRS to make a determination
if requested by a taxpayer. Accordingly, no changes were made to the
final regulations as a result of this comment.
Although the regulations do not require the IRS to make a cease-to-
exist determination upon a formal request, the regulations have been
revised to provide that a partnership does not cease to exist for
purposes of section 6241(7) without the IRS determining the partnership
has ceased to exist. Under proposed Sec. 301.6241-3(b), cease to exist
was defined as a situation where the partnership terminates under
section 708(b)(1) or is unable to pay, in full, any amount due under
subchapter C of chapter 63. It was not clear from the proposed
regulations whether a partnership meeting those criteria could cease to
exist without an accompanying determination to that effect by the IRS.
The final regulations under Sec. 301.6241-3(b) make clear that a
partnership ceases to exist if the partnership terminates within the
meaning of section 708(b)(1) or the partnership does not have the
ability to pay, in full, any amount due under subchapter C of chapter
63, but only if the IRS makes a determination that the partnership has
ceased to exist under one of those two situations. The final
regulations provide certainty to both taxpayers and the IRS about when
a partnership ceases to exist and make the cease-to-exist rules more
administrable for the IRS by eliminating any confusion about whether a
partnership has ceased to exist.
Proposed Sec. 301.6241-3(b)(1) provided that if the IRS determines
that a partnership ceased to exist, the IRS will notify the partnership
and its former partners within 30 days of such determination. The final
regulations clarify that a failure by the IRS to send a notification
required under Sec. 301.6241-3(b)(1) to the former partners of the
partnership does not invalidate a determination that the partnership
has ceased to exist. In addition, one comment suggested that the IRS
should also notify the partnership representative (and designated
individual, if applicable). To the extent the comment is referring to
the partnership representative of the audited partnership, the comment
has been adopted. In the case of a determination that the partnership
has ceased to exist, the IRS will notify the partnership, the former
partners of the partnership, and when an audited partnership has ceased
to exit, the partnership representative (and designated individual, if
applicable) for the reviewed year. This rule is consistent with the
other notification provisions throughout the centralized partnership
audit regime, which provide notification to the partnership
representative and designated individual, if applicable. To the extent
the comment was referring to a partnership that received a push out
statement, the comment was not adopted. The partnership representative
from the reviewed year or any other year of a partnership that received
a push out statement has no connection to the unpaid, current liability
and notification would not be appropriate or necessarily beneficial to
the partnership. In addition, there would be administrative complexity
for the IRS in determining the appropriate partnership representative
for a partnership partner to notify because the IRS will only have been
in contact with the partnership representative of the audited
partnership, not partnership representatives of other partnerships not
subject to an administrative proceeding.
The same comment also suggested that the partnership should be
allowed to appeal a determination that the partnership has ceased to
exist to the IRS Office of Appeals within 60 days of the receipt of the
IRS's determination that the partnership has ceased to exist. This
comment was not adopted. As discussed in section 11 of this Summary of
Comments and Explanation of Revisions, any guidance regarding the
availability of review by the IRS Office of Appeals will be provided
outside of these regulations to preserve flexibility and allow the IRS
to revise its procedures as it gains experience with
[[Page 6529]]
the centralized partnership audit regime.
Former proposed Sec. 301.6241-3(b)(2)(iii) had provided that the
IRS could not determine that a partnership ceased to exist with respect
to a partnership adjustment after the expiration of the period of
limitations on collection applicable to the amount due resulting from
such adjustment. One comment observed that the reference to the
``period of limitations on collection applicable to the amount due''
did not specify whether the period of limitations related to the
partnership or the partner. In the August 2018 NPRM, former proposed
Sec. 301.6241-3(b)(2)(iii) was revised to provide that the relevant
period of limitations is the period of limitations on collection
applicable to the assessment made against the partnership for the
amount due resulting from such adjustment. Because the plain language
of proposed Sec. 301.6241-3(b)(2)(iii) resolves the ambiguity
identified by the comment, no further changes were made in the final
regulations in response to this comment.
ii. Definition of Former Partners
Proposed Sec. 301.6241-3(d) defined the term ``former partners''
as the adjustment year partners of the partnership that ceased to
exist, unless there are no adjustment year partners in which case the
former partners are 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. If the IRS determined that the
partnership ceased to exist prior to the partnership adjustments taking
effect, the former partners of the partnership take into account the
partnership adjustments as if the partnership had made an election
under section 6226 to push out the adjustments to the former partners.
See proposed Sec. 301.6241-3(e).
One comment expressed concern that, once a partnership was placed
under examination, the partners could transfer their partnership
interests to defunct corporations or otherwise uncollectible entities
such that the IRS would be unable to collect from the ``former
partners'' under the provisions of proposed Sec. 301.6241-3.
Similarly, the comment expressed concern that if the partnership was
able to pay some but not all of the amounts due under the centralized
partnership audit regime and the IRS did not determine that the
partnership had ceased to exist, the partners would benefit from the
improper treatment of the items and the partnership will not have paid
the amounts owed as a result of the adjustments. The comment suggested
that the final regulations add the ability for the IRS to assess the
transferees of the former partners and the owners of the partnership.
Under section 6232(f), as added by the TTCA after the comment was
received, if the partnership does not pay any amount of the imputed
underpayment or specified similar amount (as defined in section
6232(f)(2)) within 10 days after the date on which the IRS provides
notice and demand for such payment, the IRS may assess upon each
partner of the partnership (as of the close of the adjustment year) or,
if the partnership has ceased to exist, the former partners of the
partnership, a tax equal to such partner's proportionate share of such
amount (including any penalties and interest). Section 6232(f) provides
the IRS with the ability to directly make assessments against the
partners of a partnership that fails to pay an imputed underpayment or
specified similar amount much like the assessment authority suggested
by the comment. In addition, nothing in proposed Sec. 301.6241-3
limits or otherwise modifies the IRS's existing tools under the Code,
related case law, or any other law with respect to transferee
liability. Accordingly, no changes were made to the final regulations
in response to this comment. For these reasons, the clarification
recommended by the comment was not adopted.
Another comment suggested that the definition of ``former
partners'' under proposed Sec. 301.6241-3(d) should include the
reviewed year partners of the partnership that has ceased to exist in
situations where the partnership has made an election under section
6226. Proposed Sec. 301.6241-3(b)(2)(i)(A) provided that the IRS may
not determine that a partnership has ceased to exist solely because the
partnership has a valid election under section 6226 in effect with
respect to any imputed underpayment. If the partnership makes a valid
election under section 6226, the partnership is not liable for the
imputed underpayment to which the election relates. See section 6226(a)
and Sec. 301.6226-1(b)(2). As a result, the IRS cannot determine the
partnership ceases to exist with respect to that imputed underpayment
(see Sec. 301.6241-3(b)(2)), and the cease to exist provisions under
proposed Sec. 301.6241-3 will not apply to such partnership with
respect to that imputed underpayment. Therefore, this comment was not
adopted.
Although this comment was not adopted, a clarification was made to
the definition of ``former partners'' under proposed Sec. 301.6241-
3(d)(1)(i). As stated earlier in this section of the preamble, the term
``former partners'' was defined under proposed Sec. 301.6241-
3(d)(1)(i) as the partners for the adjustment year that corresponds to
the partnership taxable year to which the partnership adjustment
relates. The final regulations under Sec. 301.6241-3(d)(1)(i) clarify
that the term ``former partners'' means, for a partnership that has
ceased to exist, the partners of the partnership during the adjustment
year (as defined in Sec. 301.6241-1(a)(2)) that corresponds to the
reviewed year for which the adjustments were made.
C. Payments Nondeductible
Proposed Sec. 301.6241-4 provided that no deduction is allowed
under subtitle A of the Code for any payment required to be made by a
partnership under the centralized partnership audit regime, which
includes any imputed underpayment or any interest, penalties, additions
to tax, or additional amounts with respect to an imputed underpayment.
Former proposed Sec. 301.6225-1(a) provided that a partnership's
expenditure for the imputed underpayment ``and the adjustments that
result in the imputed underpayment'' are taken into account by the
partnership in accordance with Sec. 301.6241-4.'' One comment
suggested that, because of the cross reference to Sec. 301.6241-4 in
former proposed Sec. 301.6225-1(a), that the regulations under Sec.
301.6241-4 be revised to address the treatment of the adjustments that
result in the imputed underpayment. This comment was not adopted.
Proposed Sec. 301.6241-4 addressed the deductibility of payments
required under the centralized partnership audit regime and did not
address the treatment of adjustments that were taken into account in
determining the amount of such payments. In the August 2018 NPRM,
former proposed Sec. 301.6225-1(a) was revised to remove the erroneous
cross-reference to the adjustments being taken into account under Sec.
301.6241-4. To the extent the comment was recommending that revision,
the comment was addressed by the revisions in the August 2018 NPRM. To
the extent the comment was recommending guidance on the treatment of
partnership adjustments in the context of adjusting tax attributes,
those rules were provided in proposed Sec. Sec. 301.6225-4 and
301.6226-4.
D. Extension to Entities Filing Partnership Returns
Proposed Sec. 301.6241-5(c)(2) provided that the centralized
partnership audit regime would not apply to a taxable year for which a
partnership return was
[[Page 6530]]
filed for the sole purpose of making an election described in section
761(a) (regarding election out of subchapter K for certain
unincorporated organizations). The final regulations under Sec.
301.6241-5(c)(2) retain this rule but clarify that the centralized
partnership audit regime will not apply to a taxable year in which a
valid section 761(a) election is made. This change was made to clarify
that the election under section 761(a) must be valid in order for the
rules under Sec. 301.6241-5 not to apply to a partnership return that
is filed with respect to a taxable year.
11. Comments Concerning IRS Appeals Office
Several comments were received regarding the interaction between
the centralized partnership audit regime and the IRS Appeals. For
example, certain comments suggested the regulations clarify the rules
regarding a partnership's ability to raise various issues and
determinations with IRS Appeals, including the timing of any
involvement by IRS Appeals.
Procedures governing IRS Appeals are beyond the scope of these
regulations. Accordingly, except as described in sections 3.B.i.,
3.B.vii., 4.B.v., and 10.B.i. of this preamble, neither this preamble
nor the regulations address IRS Appeals procedures in the context of
the centralized partnership audit regime. These procedures are expected
to be addressed in future guidance.
12. Effect of Provisions Enacted Under the Tax Cuts and Jobs Act
One comment suggested that the final regulations include guidance
on the effect of the new partnership-related provisions of the Tax Cuts
and Jobs Act, formally known as ``An Act to provide for reconciliation
pursuant to titles II and V of the concurrent resolution on the budget
for fiscal year 2018,'' Public Law 115-97 (TCJA), including examples of
how adjustments to partnership-related items and tax attributes
specific to the new TCJA provisions are treated under sections 6225 and
6226 by partnerships and their partners.
The Treasury Department and the IRS have determined not to provide
guidance on how the provisions of the TCJA, including any partnership-
related provisions, interact with the centralized partnership audit
regime. The TCJA provisions are substantive tax rules that work
independently of the procedural rules of the centralized partnership
audit regime. Therefore, no change would necessarily be required as a
result of these substantive provisions. However, as the Treasury
Department and the IRS continue to gain experience with the centralized
partnership audit regime and implement rules under the new TCJA
provisions, guidance will be issued if it is later determined that
doing so would be appropriate. For these reasons, this comment was not
adopted.
13. Effective Date of Centralized Partnership Audit Regime
Several comments recommended that the effective date of the
centralized partnership audit regime be delayed. These comments were
not adopted because the effective date for the statutory provisions
governing the centralized partnership audit regime is established by
statute. See BBA section 1101(g).
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 Treasury Department and the Office of Management
and Budget regarding review of tax regulations. Therefore, a regulatory
impact assessment is not required.
Because the final 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, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business, and no comments were received.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices and other guidance
cited in this preamble are published in the Internal Revenue Bulletin
(or Cumulative Bulletin) and are available from the Superintendent of
Documents, U.S. Government Publishing Office, Washington, DC 20402, or
by visiting the IRS website at www.irs.gov.
Drafting Information
The principal authors of these final regulations are Jennifer M.
Black of the Office of the Associate Chief Counsel (Procedure and
Administration), Steven L. Karon of the Office of the Associate Chief
Counsel (Procedure and Administration), and Joy E. Gerdy Zogby of the
Office of the Associate Chief Counsel (Procedure and Administration).
However, other personnel from the Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
0
Paragraph 1. The authority citation for part 301 is amended by adding
entries for Sec. Sec. 301.6221(a)-1, 301.6222-1, 301.6225-1, 301.6225-
2, 301.6225-3, 301.6226-1, 301.6226-2, 301.6226-3, 301.6227-1,
301.6227-2, 301.6227-3, 301.6231-1, 301.6232-1, 301.6233(a)-1,
301.6233(b)-1, 301.6234-1, 301.6235-1, 301.6241-1, 301.6241-2,
301.6241-3, 301.6241-4, 301.6241-5, and 301.6241-6 in numerical order
to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6221(a)-1 also issued under 26 U.S.C. 6221.
Section 301.6222-1 also issued under 26 U.S.C. 6222 and 6223.
* * * * *
Section 301.6225-1 also issued under 26 U.S.C. 6225.
Section 301.6225-2 also issued under 26 U.S.C. 6223 and 6225.
Section 301.6225-3 also issued under 26 U.S.C. 6225.
* * * * *
Section 301.6226-1 also issued under 26 U.S.C. 6223 and 6226.
Section 301.6226-2 also issued under 26 U.S.C. 6226.
Section 301.6226-3 also issued under 26 U.S.C. 6226.
* * * * *
Section 301.6227-1 also issued under 26 U.S.C. 6223 and 6227.
Section 301.6227-2 also issued under 26 U.S.C. 6227.
Section 301.6227-3 also issued under 26 U.S.C. 6227.
* * * * *
Section 301.6231-1 also issued under 26 U.S.C. 6231.
* * * * *
Section 301.6232-1 also issued under 26 U.S.C. 6232.
* * * * *
Section 301.6233(a)-1 also issued under 26 U.S.C. 6233.
Section 301.6233(b)-1 also issued under 26 U.S.C. 6233.
Section 301.6234-1 also issued under 26 U.S.C. 6234.
Section 301.6235-1 also issued under 26 U.S.C. 6235.
Section 301.6241-1 also issued under 26 U.S.C. 6241.
* * * * *
[[Page 6531]]
Section 301.6241-2 also issued under 26 U.S.C. 6241.
Section 301.6241-3 also issued under 26 U.S.C. 6241.
Section 301.6241-4 also issued under 26 U.S.C. 6241.
Section 301.6241-5 also issued under 26 U.S.C. 6241.
* * * * *
Section 301.6241-6 also issued under 26 U.S.C. 6241.
* * * * *
0
Par. 2. 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 in this part, any adjustment to a partnership-
related item (as defined in Sec. 301.6241-1(a)(6)(ii)) is determined,
any tax imposed by chapter 1 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.
(b) Legal and factual determinations at the partnership level.
Except as otherwise provided under subchapter C of chapter 63, any
legal or factual determinations underlying any adjustment or
determination made in accordance with paragraph (a) of this section are
also determined at the partnership level under subchapter C of chapter
63. For instance, determinations under this paragraph (b) include any
determinations necessary to calculate the imputed underpayment or any
modification of the imputed underpayment under section 6225 and the
period of limitations on making adjustments under subchapter C of
chapter 63.
(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, and ending after
August 12, 2018.
(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. 3. 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. 301.6241-1(a)(6)(ii)) 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 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. For purposes of this section, the term partner's return
includes any return, statement, schedule, or list, and any amendment or
supplement thereto, filed by the partner with respect to any tax
imposed by the Internal Revenue Code (Code).
(2) Partner that is a partnership with an election in effect under
section 6221(b). The rules of this section apply to all partners,
including a partnership-partner (as defined in Sec. 301.6241-1(a)(7))
that has an election in effect under section 6221(b) for any taxable
year. 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.
(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 Internal Revenue Service (IRS) under
section 6031, and any amendment or supplement thereto, including an
administrative adjustment request (AAR) filed pursuant to section 6227;
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 IRS, including any statements filed pursuant to section 6226.
(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 of the Code
(subchapter C of chapter 63), and each partnership and its partners are
calendar year taxpayers, unless otherwise stated.
(i) Example 1. A is a partner in Partnership during 2018 and
2019. 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. A includes its distributive
share of income from the advance payment on A's income tax return
for 2019 and not on A's income tax return for 2018. A has not
satisfied the requirements of paragraph (a) of this section because
A's treatment of the income attributable to Partnership is
inconsistent with the treatment of that item by Partnership on its
partnership return.
(ii) Example 2. B 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. B deducted his distributive share of the start-
up costs on B's 2018 income tax return. B has not satisfied the
requirements of paragraph (a) of this section because B's treatment
of the start-up costs is inconsistent with the treatment of that
item by Partnership on its partnership return.
(iii) Example 3. C 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 C's distributive share of that loss.
On the 2018 Schedule K-1 furnished to C, however, Partnership
reports $15,000 as C's distributive share of the loss. C reports the
$15,000 loss on C's 2018 income tax return. C has not satisfied the
requirements of paragraph (a) of this section because C reported C's
distributive share of the loss in a manner that is inconsistent with
how C'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.
(iv) 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, 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.
D has not satisfied the requirements of paragraph (a) of this
section because D has not taken into
[[Page 6532]]
account his share of the loss in a manner consistent with how
Partnership treated such items on the partnership return actually
filed.
(v) Example 5. E was a partner in Partnership during 2018. In
2021, Partnership receives a notice of final partnership adjustment
(FPA) in an administrative proceeding under subchapter C of chapter
63 with respect to Partnership's 2018 taxable year. The FPA reflects
an imputed underpayment. Partnership properly elects the application
of section 6226 with respect to the imputed underpayment and files
with the IRS 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. 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
section 6226 statement filed with the IRS.
(vi) Example 6. F was a partner in Partnership during 2018. F
has a valid election under section 6221(b) in effect with respect to
F's 2018 partnership taxable year. Notwithstanding F's election
under section 6221(b) for its 2018 taxable year, F is subject to
section 6222 for taxable year 2018. F must treat, on its 2018
partnership return, any items attributable to F'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.
(vii) Example 7. G was a partner in Partnership during 2018.
G's taxable year ends on the same day as Partnership's 2018 taxable
year. Partnership did not file a partnership return for its 2018
taxable year. G files an income tax return for its 2018 taxable year
and reports G's share of a loss attributable to G's interest in
Partnership. Because Partnership failed to file a partnership
return, G's treatment of such loss is per se inconsistent pursuant
to paragraph (a)(3) of this section.
(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 (or where no
partnership return was filed, remove any treatment of such items from
the partner's return) and determine any underpayment of tax that
results from that adjustment. For purposes of this section, except as
provided in paragraph (b)(3) 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 were 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. For the effect of a
failure to satisfy the requirements of paragraph (a) of this section
where the partner is itself a partnership (a partnership-partner), see
section 6232(d)(1)(B) and Sec. 301.6232-1(d).
(4) Examples. The following examples illustrate the rules of this
paragraph (b). 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.
(i) Example 1. H, an individual, is a partner in Partnership.
On its partnership return for taxable year 2018, Partnership reports
$100,000 in ordinary income. On the Schedule K-1 attached to the
partnership return, as well as on the Schedule K-1 furnished to H,
Partnership reports $15,000 as H's distributive share of the
$100,000 in ordinary income. H 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 H's interest in Partnership reported on H's 2018
income tax return from $5,000 to $15,000 and assess that resulting
underpayment in tax as if it were on account of a mathematical or
clerical error appearing on H's return. H may not request an
abatement of that assessment under section 6213(b).
(ii) Example 2. J was a partner in Partnership during 2018. In
2021, Partnership receives an FPA in an administrative proceeding
under subchapter C of chapter 63 with respect to Partnership's 2018
taxable year. The FPA reflects an imputed underpayment. Partnership
properly elects the application of section 6226 with respect to the
imputed underpayment and files with the IRS and furnishes to J a
statement of J's share of adjustments with respect to Partnership's
2018 taxable year. J fails to report one adjustment reflected on the
statement, J's share of a decrease in the amount of losses for 2018,
on J's return as required by section 6226. The IRS may determine the
amount of tax that results from adjusting the decrease in the amount
of losses on J'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 were on account of a
mathematical or clerical error appearing on J's return. J 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. For instance, 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 a statement
described in Sec. 301.6226-2 filed by the partnership with the IRS.
See Sec. 301.6226-1(e) (regarding the binding nature of statements
described in Sec. 301.6226-2). Any underpayment resulting from the
inconsistent treatment of an item described in this paragraph (c)(2)
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
[[Page 6533]]
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. If the IRS conducts a proceeding with respect to the
partnership regarding the identified, inconsistently reported item,
each partner of the partnership, including any partner that notified
the IRS of inconsistent treatment in accordance with paragraph (c)(1)
of this section, is bound by actions taken by the partnership and by
any final decision in the proceeding with respect to the partnership.
See paragraph (c)(2) of this section.
(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) Limitation on treating partnership-related items inconsistently
after notice of administrative proceeding. After a notice of
administrative proceeding with respect to a partnership taxable year
has been mailed by the IRS under section 6231, a partner may not notify
the IRS the partner is treating a partnership-related item on the
partner's return inconsistently with how such item was treated on the
partnership return for such taxable year, except as provided in Sec.
301.6225-2.
(6) 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.
(i) Example 1. K is a partner in Partnership during 2018. K
treats a deduction and a capital gain attributable to Partnership on
K's 2018 income tax return in a manner that is inconsistent with the
treatment of those items by Partnership on its 2018 partnership
return. K 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 K 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 K'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 were on account of a
mathematical or clerical error appearing on K's return.
(ii) Example 2. L is a partner in Partnership during 2018. On
its 2018 partnership return, Partnership treats partner L's
distributive share of ordinary loss attributable to Partnership as
$8,000. L, 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 L'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 L's distributive share of the ordinary loss from
Partnership is $3,000. During the same proceeding, the IRS also
determines that L overstated a charitable contribution deduction in
the amount of $2,500 on its 2018 income tax return. The
determination of the adjustment of L'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 L's partner return, to $8,000, as originally
reported by Partnership on its partnership return, nor is the IRS
prohibited from adjusting the charitable contribution deduction in
the proceeding with respect to L.
(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. M is a partner in Partnership for 2018. Partnership is
subject to subchapter C of chapter 63, and both Partnership and M are
calendar year taxpayers. On its 2018 partnership return, Partnership
reports that M's distributive share of ordinary income attributable to
Partnership is $1,000. Partnership furnishes to M a Schedule K-1 for
2018 showing $500 as M's distributive share of ordinary income. M
reports $500 of ordinary income attributable to Partnership on its 2018
income tax return consistent with the Schedule K-1 furnished to M. The
IRS notifies M that M'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 M on its 2018
partnership
[[Page 6534]]
return. Within 60 days of receiving the notice from the IRS of the
inconsistency, M files an election with the IRS in accordance with
paragraph (d)(2) of this section. Because M made a valid election under
section 6222(c)(2)(B) and paragraph (d)(1) of this section, M 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, and ending after
August 12, 2018.
(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. 4. 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 for 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 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 as net positive adjustments (as defined in
paragraph (e)(4)(i) of this section) under paragraph (e)(3)(ii) of this
section; and
(B) Except as provided in paragraph (e)(3)(ii) of this section, any
amounts treated as net negative adjustments (as defined in paragraph
(e)(4)(ii) of this section) under paragraph (e)(3)(ii) 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 of the Internal Revenue Code. A partnership adjustment
is disregarded for purposes of calculating the imputed underpayment
under paragraph (b) 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. 301.6241-6(b)(2)(ii) and (iii)) that is
attributable to the partnership adjustment. See Sec. 301.6241-6(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. 301.6241-6(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 one partnership adjustment is
reflected in one or more other partnership adjustments, the IRS may
treat the one 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
[[Page 6535]]
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 adjustment and one negative
adjustment.
(d) Subgroupings--(1) In general. If all partnership adjustments
are positive adjustments, this paragraph (d) does not apply. 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). 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, to the extent
appropriate, either as a positive adjustment to income or to a credit.
(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, regulations,
forms, instructions, or other guidance prescribed by the IRS applicable
to the adjusted partnership-related item. A negative adjustment 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), other
provision of the Code, regulations, forms, instructions, or other
guidance prescribed by the IRS. For purposes of creating subgroupings
under this section, if any adjustment could be subject to any
preference, limitation, or restriction under the Code
[[Page 6536]]
(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.
(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. Notwithstanding
the requirement that reallocation adjustments be placed into separate
subgroupings, 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 adjustment. 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 paragraphs (d)(3)(i) and (iii) of this section. For
rules related to creditable expenditures other than CFTEs, see
paragraph (d)(3)(iii)(C) of this section.
(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
in part 1 of this chapter, 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) [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 in accordance with paragraph (c) of this section.
If a negative adjustment is in a subgrouping in accordance with
paragraph (d) of this section, the negative adjustment may only net
with a positive adjustment also in that same subgrouping in accordance
with paragraph (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 described in this paragraph (e)(3)(ii) is taken
into account under paragraph (b)(1)(v) of this section. A net negative
adjustment described in this paragraph (e)(3)(ii), including a negative
adjustment to a credit resulting from a reallocation adjustment that
was placed in a separate subgrouping pursuant to 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, unless the IRS determines that such net
negative adjustment should be taken into account under paragraph
(b)(1)(v) 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) of this section) is treated as a net
positive adjustment described in paragraph (e)(3)(ii) of this section
and is excluded from the calculation of the total netted partnership
adjustment under paragraph (b)(2) 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. For rules related to
creditable expenditures other than CFTEs, see paragraph (e)(3)(iii)(B)
of this section.
(B) [Reserved]
(4) Net positive adjustment and net negative adjustment defined--
(i) Net positive adjustment. A net positive
[[Page 6537]]
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 (f)(1) 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 (g)(2)(ii) of this section) and a specific
imputed underpayment (described in paragraph (g)(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 (f) 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 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 (g)(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, unless otherwise stated, 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, 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.
(1) 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 not have been netted at the partnership level with the $5
[[Page 6538]]
adjustment to ordinary income and would not have been required to be
allocated to the partners of the partnership as a single
partnership-related item for purposes of section 702(a), other
provision of the Code, regulations, forms, instructions, or other
guidance prescribed by the IRS. Because 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 and
because it might be limited if taken into account by any person, the
-$10 adjustment must be placed in a separate subgrouping from the $5
adjustment to ordinary income. See paragraph (d)(3)(i) of this
section. 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.
(2) Example 2. The facts are the same as Example 1 in paragraph
(h)(1) of this section, except that the -$10 adjustment to the
ordinary deduction would have been netted at the partnership level
with the $5 adjustment to ordinary income and 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),
other provision of the Code, regulations, forms, instructions, or
other guidance prescribed by the IRS. Therefore, the $5 adjustment
and the -$10 adjustment must be placed in the same subgrouping
within the residual grouping. The $5 adjustment and the -$10
adjustments are then netted in accordance with paragraph (e) of this
section. Such netting results in a net negative adjustment (as
defined under paragraph (e)(4)(ii) of this section) of -$5. Pursuant
to paragraph (f) of this section, the -$5 net negative adjustment is
an adjustment that does not result in an imputed underpayment.
Because the only net adjustment is an adjustment that does not
result in an imputed underpayment, there is no imputed underpayment.
(3) 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
adjustment to 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 are no subgroupings within the
residual grouping. Under paragraph (b)(2) of this section, 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)(v) of this section, the $142 is increased by the $2
credit adjustment, resulting in an imputed underpayment of $144.
(4) Example 4. Partnership reported on its 2019 partnership
return long-term capital gain of $125. 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 and is taken into account in accordance with Sec.
301.6225-3. 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.
(5) 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 reported a portion of the expenses as a
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 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.
(6) 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.
(7) 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) of this section, the adjustment to the character of
the liability is an adjustment to an item that cannot be allocated
under section 704(b). The adjustment therefore is treated as 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.
(8) 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
[[Page 6539]]
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.
(9) 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 positive adjustment to (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.
(10) 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 positive adjustment to
(decrease in) 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.
(11) 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 income 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 percent and to B 25 percent. Items related to DE2: To A 25
percent and to B 75 percent. 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.
(12) Example 12. Partnership has two partners, A and B. For the
2019 taxable year, Partnership allocated $70 of long term capital
loss to B as well as $30 of ordinary income. In an administrative
proceeding with respect to Partnership's 2019 taxable year, the IRS
determines that the $30 of ordinary income and the $70 of long term
capital loss should be reallocated from B to A. The partnership
adjustments are a decrease of $30 of ordinary income (-$30
adjustment) allocated to B and a corresponding increase of $30 of
ordinary income ($30 adjustment) allocated to A, as well as a
decrease of $70 of long term capital loss ($70 adjustment) allocated
to B and a corresponding increase of $70 of long term capital loss
(-$70 adjustment) allocated to A. See paragraph (c)(2)(ii) of this
section. Pursuant to paragraph (d)(3)(ii)(A) of this section, for
purposes of determining the imputed underpayment, each positive
adjustment and each negative adjustment allocated to A and B is
placed in its own separate subgrouping. However, notwithstanding the
general requirement that reallocation adjustments be subgrouped
separately, the reallocation adjustments allocated to A and B may be
subgrouped in accordance with paragraph (d)(3)(i) of this section
because there are two reallocation adjustments allocated to each of
A and B, respectively. Pursuant to paragraph (d)(3)(i) of this
section, because the partnership adjustment allocated to A would not
have been netted at the partnership level and would not have been
allocated to A as a single partnership-related item for purposes of
section 702(a), other provisions of the Code, regulations, forms,
instructions, or other guidance prescribed by the IRS, the positive
adjustment and the negative adjustment allocated to A remain in
separate subgroupings. For the same reasons with respect to the
adjustments allocated to B, the positive adjustment and the negative
adjustment allocated to B also remain in separate subgroupings. As a
result, the reallocation grouping would have four subgroupings, one
for each adjustment: The decrease in ordinary income allocated to B
(-$30 adjustment), the increase in ordinary income allocated to A
($30 adjustment), the decrease in long term capital loss allocated
to B ($70 adjustment), and the increase long term capital loss
allocated to A (-$70 adjustment). Pursuant to paragraph (e) of this
section, no netting may occur between subgroupings. Accordingly, the
ordinary income allocated to A ($30 adjustment) and the long term
capital loss allocated to B ($70 adjustment) are both net positive
adjustments. These net positive adjustments are added together to
determine the total netted partnership adjustment of $100. The total
netted partnership adjustment is multiplied by 40 percent, which
results in an imputed underpayment of $40. The ordinary income
allocated to B (-$30 adjustment) and the long term capital loss
allocated to A (-$70 adjustment) are net negative adjustments
treated as adjustments that do not result in an imputed underpayment
taken into account by the partnership pursuant to 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, and ending after
August 12, 2018.
(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. 5. 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
[[Page 6540]]
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 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 income 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 income 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; and
(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 was allocated in the NOPPA, or if the
appropriate allocation was not addressed in the NOPPA, how the
adjustment would be properly allocated under subchapter K of chapter 1
of the Internal Revenue Code (subchapter K) 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.
[[Page 6541]]
(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
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), (3), and (5) through (10) of this section with
respect to any relevant partner. Notwithstanding the preceding
sentence, the partnership may request that the IRS apply the rule in
paragraph (b)(3)(iii)(A) of this section when determining each relevant
partner's distributive share for purposes of this paragraph (b)(3)(iv).
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. Any calculation by the partnership that is necessary to comply
with the rules in this paragraph (b)(3)(iv) is not considered a
revaluation for purposes of section 704.
(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 (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. Pursuant to section 6241(10), the IRS may
require the partnership to file or submit anything required to be filed
or submitted under this section to be filed or submitted
electronically. 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, or if the IRS
determines there is a failure by any person to make any required
payment, 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 such information as is required by forms,
instructions, and other guidance prescribed by the IRS or that is
otherwise requested by the IRS related to the requested modification.
Such information may include 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 or wholly-
owned entity disregarded as separate from its owner for Federal income
tax purposes 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
[[Page 6542]]
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 prescribed by the
IRS 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 the form and manner
prescribed by form, instructions, or other guidance prescribed by the
IRS 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
adjustments properly allocable to such relevant partner are taken into
account and any amount due is paid in accordance with 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 paragraph (d)(2) of this
section 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 the alternative
procedure described in paragraph (d)(2)(x) of this section, an amended
return modification request under paragraph (d)(2) of this section will
not be approved unless the provisions of this paragraph (d)(2)(ii) are
satisfied. The partnership may satisfy the requirements of paragraph
(d)(2) of this section by demonstrating in accordance with forms,
instructions, and other guidance provided by the IRS that a relevant
partner has previously taken into account the partnership adjustments
described in paragraph (d)(2)(i) of this section, made any required
adjustments to tax attributes resulting from the partnership
adjustments for the years described in paragraph (d)(2)(ii)(B) of this
section, and made all required payments under paragraph (d)(2)(ii)(A)
of this section.
(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 all partnership 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. Except for a pass-through partner
calculating its payment amount pursuant to paragraph (d)(2)(vi) of this
section, for purposes of this paragraph (d)(2)(ii)(A), the term tax
means tax imposed by chapter 1 of the Internal Revenue Code (chapter
1).
(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 partnership adjustments that reallocate
the distributive shares 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
adjustments file amended returns in accordance with paragraph (d)(2) of
this section. 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 adjustments file amended returns provided any relevant
partners affected by the reallocation not filing amended returns take
into account their distributive share of the adjustments through other
modifications approved by the IRS (including the alternative procedure
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 adjustments that reallocate 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 adjustments and the
other affected relevant partner signs a closing agreement with the IRS
taking into account the adjustments. Similarly, in the case of
adjustment that reallocate income from one partner to another, the IRS
may determine that the requirements of this paragraph (d)(2)(ii)(C)
have been satisfied to the extent an affected relevant partner meets
the requirements of paragraph (d)(3) of this section (regarding tax-
exempt partners) and through such modification fully takes into account
all adjustments reallocated to the affected relevant partner.
(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
[[Page 6543]]
IRS. Except as otherwise provided under the alternative procedure
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 paragraph (d)(2) of this section 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 (directly or indirectly)
through a pass-through partner that could be subject to tax imposed by
chapter 1 (chapter 1 tax) 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 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 or claim for refund that takes
into account partnership adjustments except as described in paragraph
(d)(2) of this section.
(B) Further amended returns restricted. Except as described in
paragraph (d)(2)(vii)(C) of this section, if a relevant partner files
an amended return under paragraph (d)(2) of this section, or satisfies
paragraph (d)(2) of this section by following the alternative procedure
under paragraph (d)(2)(x) of this section (the alternative procedure),
such partner may not file a subsequent amended return or claim for
refund to change the treatment of partnership adjustments taken into
account through amended return or the alternative procedure.
(C) Subsequent returns in the case of changes to partnership
adjustments or denial of modification. Notwithstanding paragraph
(d)(2)(vii)(B) of this section, a relevant partner that has previously
filed an amended return under paragraph (d)(2) of this section, or
satisfied the requirements of paragraph (d)(2) of this section through
the alternative procedure, to take partnership adjustments into account
may, in accordance with forms, instructions, and other guidance
prescribed by the IRS, file a subsequent return or claim for refund if
a determination is made by a court or by the IRS that results in a
change to the partnership adjustments taken into account in
modification under paragraph (d)(2) of this section or a denial of
modification by the IRS under paragraph (c)(2)(i) of this section with
respect to a modification request under paragraph (d)(2) of this
section. Such determinations include a court decision that changes the
partnership adjustments for which modification was requested or a
settlement between the IRS and the partnership pursuant to which the
partnership is not liable for all or a portion of the imputed
underpayment for which modification was requested. Any amended return
or claim for refund filed under this paragraph (d)(2)(vii) is subject
to the period of limitations under section 6511.
(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 paragraph (d)(2) of this section. 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. Unless forms, instructions or other guidance provided by the IRS
allow for an alternative procedure for raising a partner-level defense
(as described in Sec. 301.6226-3(d)(3)), a relevant partner may raise
a partner-level defense by first paying the penalty, addition to tax,
or additional amount with the amended return filed under paragraph
(d)(2) of this section 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
[[Page 6544]]
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
paragraph (d)(2)(x) of this section 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 paragraph (d)(2)(x) of this section is not a claim for
refund with respect to any person.
(B) Modifications with respect to reallocation adjustments. A
submission made in accordance with paragraph (d)(2)(x) of this section
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)) requesting modification under this section, an
imputed underpayment is determined without regard to any 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--
(1) The specified partner's taxable year in which or with which the
adjustment year (as defined in Sec. 301.6241-1(a)(1)) of the
partnership ends, reduced to the extent any such partner has utilized
any portion of its 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) If the adjustment year has not yet been determined, the most
recent year for which the publicly traded partnership has filed a
return under section 6031, 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 any year.
(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 the publicly traded partnership
requesting modification under this section;
(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 the year described in paragraph (d)(5)(ii)(B)(2) of this
section. Notwithstanding the preceding sentence, an indirect partner of
the publicly traded partnership requesting modification under this
section may also be a qualified relevant partner under this paragraph
(d)(5)(iv) if that indirect partner meets the requirements of paragraph
(d)(5)(iii)(B) and (C) of this section for each year beginning with the
first affected year through the year 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
[[Page 6545]]
suspended passive activity loss carryovers at the end of the adjustment
year to take into account the amount of any passive activity 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 activity 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. In the
case of an indirect partner that is a qualified relevant partner, the
IRS may prescribe additional guidance through forms, instructions, or
other guidance to require reporting under this paragraph (d)(5)(v). The
reduction in suspended passive activity loss carryovers as reported to
a specified partner or qualified relevant 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 and qualified
relevant partners under section 6223.
(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 paragraph (d)(6) of this
section 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 paragraph (d)(7) of this section 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,
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. Any
required payment under the closing agreement may include amounts of
tax, including tax under chapters other than chapter 1, interest,
penalties, additions to tax and additional amounts. 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, in the reviewed year, the relevant partner was a foreign
person who qualified under an income tax treaty with the United States
for a reduction or exemption from tax with respect to such partnership-
related item. A partnership requesting modification under this section
may also request a treaty modification under this paragraph (d)(9)
regardless of the treaty status of its partners if, in the reviewed
year, the partnership itself was an entity eligible for such treaty
benefits.
(10) Other modifications. A partnership may request a modification
not otherwise described in paragraph (d) of this section, and the IRS
will determine whether such modification is accurate and appropriate in
accordance with paragraph (c)(4) of this section. Additional types of
modifications and the documentation necessary to substantiate such
modifications may be set forth in forms, instructions, or other
guidance prescribed by the IRS.
(e) 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
[[Page 6546]]
no partnership requests modification under this section except as
provided in the example.
(1) 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 income 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, J, and K, all individuals. For purposes of
this section, if Partnership requests modification with respect to
A, B, C, F, G, H, J, and K, 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 income tax purposes and modification was not
requested with respect to P and S.
(2) 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).
(3) 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
allocable 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).
(4) Example 4. The facts are the same as in Example 3 in
paragraph (f)(3) of this section, 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).
(5) Example 5. The facts are the same as in Example 3 in
paragraph (f)(3) of this section, except that Partnership also
timely requests modification under paragraph (d)(2) of this section
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) of this section
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.
(6) Example 6. The facts are the same as in Example 3 in
paragraph (f)(3) of this section, 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 paragraph
(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 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.
(7) 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.
Under the partnership agreement in effect for Partnership's 2019
taxable year, the long-term capital gain and the increase in
depreciation would be specially allocated to B and the increase in
ordinary income would be specially allocated to A. In accordance
with Sec. 301.6225-1(c) and (d), the three adjustments are placed
into three separate
[[Page 6547]]
subgroupings within the residual grouping because the partnership
adjustments would not have been netted at the partnership level and
would not have been required to be allocated to the partners of the
partnership as a single, net partnership-related item for purposes
of section 702(a), other provisions of the Code, regulations, forms,
instructions, or other guidance prescribed by the IRS. Accordingly,
the total netted partnership adjustment is $85 ($75 net positive
adjustment to ordinary income plus $10 net positive adjustment to
long term capital gain), and the imputed under payment is $34 ($85
multiplied by 40 percent). The net negative adjustment to
depreciation is an adjustment that does not result in an imputed
underpayment subject to treatment under Sec. 301.6225-3.
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 would consist of the $75 increase in ordinary income,
and thus the total netted partnership adjustment for the specific
imputed underpayment would be $75. The specific imputed underpayment
is thus $30 ($75 multiplied by 40 percent). The general imputed
underpayment would consist of two adjustments: The long term capital
gain adjustment and the depreciation adjustment. The long term
capital gain adjustment and the depreciation adjustment would be
placed in different subgroupings under Sec. 301.6225-1(d) because
they are treated separately under section 702. Accordingly, the long
term capital gain adjustment and the depreciation adjustment are not
netted, and the long term capital gain adjustment would be a net
positive adjustment while the depreciation adjustment would be a net
negative adjustment. The long term capital gain net positive
adjustment would be the only net positive adjustment, resulting in a
total netted partnership adjustment of $10. The general imputed
underpayment is $4 ($10 multiplied by 40 percent), and the net
negative adjustment to depreciation of $25 would be an adjustment
that does not result in an imputed underpayment under Sec.
301.6225-1(f) associated with the general imputed underpayment.
(8) 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, none of
the adjustments is 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 in a net positive adjustment for the
residual grouping.
(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, and ending after
August 12, 2018.
(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. 6. 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 (7) 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. Except as
provided in forms, instructions, and other guidance prescribed by the
Internal Revenue Service (IRS), 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 does not result in an imputed
underpayment, and the IRS approves the modification, such partnership
adjustment is not taken into account by
[[Page 6548]]
the partnership in the adjustment year in accordance with Sec.
301.6225-1(a).
(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.
(7) Adjustments taken into account previously by partners. If,
prior to the mailing of a notice of administrative proceeding by the
IRS or the filing of an administrative adjustment request by the
partnership, a partner has previously taken into account an adjustment
that does not result in an imputed underpayment that would have been
taken into account under this section, such partnership adjustment is
not taken into account by such partner.
(c) Treatment of adjustment year partners. The rules under
subchapter K of chapter 1 of the Internal Revenue Code with respect to
the treatment of partners apply in the case of adjustments taken into
account by the partnership under this section.
(d) Examples. The following examples illustrate the rules of this
section. For purposes of these examples, unless otherwise provided,
each partnership is subject to the provisions of subchapter C of
chapter 63 of the Internal Revenue Code, 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.
(1) Example 1. For all of Partnership's 2019, 2020, and 2021
partnership taxable years, Partnership has two equal partners, A and
B. The IRS initiates an administrative proceeding with respect to
Partnership's 2019 partnership taxable year. The IRS mails a notice
of proposed partnership adjustment (NOPPA) to Partnership for the
2019 partnership taxable year proposing a recharacterization
adjustment, changing a $100 ordinary loss to a $100 long term
capital loss. Under Sec. 301.6225-1, this recharacterization
adjustment results in two adjustments: A $100 increase to ordinary
income (positive adjustment) and a -$100 decrease in long term
capital gain (negative adjustment). Under Sec. 301.6225-1(b), the
$100 positive adjustment is the total netted partnership adjustment,
which is multiplied by the highest rate of 40 percent, resulting in
a $40 imputed underpayment. Under Sec. 301.6225-1(f), the -$100
negative adjustment is an adjustment that does not result in an
imputed underpayment and is taken into account in accordance with
this section. On March 1, 2021, the IRS mails a notice of final
partnership adjustment (FPA), and because Partnership does not file
a petition for readjustment with respect to the FPA, the adjustments
are finally determined in 2021, and the adjustment year is
determined to be 2021 pursuant to Sec. 301.6241-1(a)(1). Pursuant
to paragraph (a) of this section, Partnership takes into account the
-$100 adjustment that does not result in an imputed underpayment on
its 2021 partnership return. In addition to the -$100 adjustment to
partnership's 2019 taxable year taken into account under this
section, Partnership has an additional $300 in long term capital
gain reportable in its 2021 taxable year. The -$100 negative
adjustment and the $300 long term capital gain are Partnership's
only long term capital gains and losses for its 2021 taxable year.
Because the -$100 net negative adjustment is an adjustment to long
term capital gain, which is a separately stated item under section
702(a)(2), the -$100 negative adjustment must be taken into account
in accordance with paragraph (b)(2) of this section. Partnership
includes both the -$100 negative adjustment and the $300 in long
term capital gain as separately stated items on its 2021 tax return.
(2) Example 2. The facts are the same as in Example 1 in
paragraph (d)(1) of this section, except that the IRS proposes a
reallocation adjustment instead of a recharacterization adjustment.
The IRS determines that the -$100 ordinary loss that the Partnership
allocated equally to A and B should instead all be allocated all to
A. The IRS mails a NOPPA for the 2019 partnership taxable year
proposing a reallocation adjustment resulting in a $50 increase in
ordinary loss allocated to A (negative adjustment) and a $50
decrease in ordinary loss allocated to B (positive adjustment).
Because the adjustments are the result of a reallocation, they are
placed in separate subgroupings pursuant to Sec. 301.6225-1(d).
Because the adjustments are in different subgroupings, the
adjustments are not netted under Sec. 301.6225-1(e), resulting in a
net negative adjustment of -$50 allocated to A and a net positive
adjustment of $50 to B. Pursuant to Sec. 301.6225-1(b), the total
netted partnership adjustment includes the $50 net positive
adjustment, and the imputed underpayment is $20 ($50 total netted
partnership adjustment x 40 percent). Pursuant to Sec. 301.6225-
1(f), the -$50 net negative adjustment is an adjustment that does
not result in an imputed underpayment and is taken into account in
accordance with this section. On March 1, 2021, the IRS mails an
FPA, and because Partnership does not file a petition for
readjustment with respect to the FPA, the adjustments are finally
determined in 2021, and the adjustment year is determined to be 2021
pursuant to Sec. 301.6241-1(a)(1). Pursuant to paragraph (a) of
this section, Partnership takes into account the -$50 adjustment
that does not result in an imputed underpayment on its 2021
partnership return. In addition to the -$50 net negative adjustment
to partnership's 2019 taxable year taken into account under this
section, Partnership also has an additional $300 in ordinary income
reportable in its 2021 taxable year unrelated to the administrative
proceeding with respect to Partnership's 2019 partnership taxable
year. Because the -$50 net negative adjustment is due to a
reallocation, the adjustment must be taken into account under
paragraph (b)(4) of this section. Because the net negative
adjustment was determined to have been entirely allocable to A, and
because A was a reviewed year partner and is also an adjustment year
partner, the net negative adjustment is taken into account by
Partnership by allocating the entire adjustment to A on its 2021 tax
return. The -$50 negative adjustment does not reduce the $300 in
ordinary income.
(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, and ending after
August 12, 2018.
(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 301.6226-1 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. In addition, a partnership
making a valid election under paragraph (c) 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 included in the FPA.
(b) Effect of election--(1) Reviewed year partners. If a
partnership makes a valid election under this section with respect to
any imputed underpayment, the reviewed year partners (as defined in
Sec. 301.6241-1(a)(9)) must take into account their share of the
partnership adjustments (as defined in Sec. 301.6241-1(a)(6)) that are
associated with that imputed underpayment and are liable for any tax,
penalties, additions to tax, additional amounts, and interest as
described in Sec. 301.6226-3. See Sec. 301.6226-2(f) regarding the
determination of each reviewed year partner's share of the partnership
adjustments, including the effect of any
[[Page 6549]]
modification approved by the Internal Revenue Service (IRS) under Sec.
301.6225-2.
(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 adjustments 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 and Sec. 301.6226-2 (regarding statements filed with
the IRS and furnished to reviewed year partners) are satisfied. 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) 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.
(3) 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
prescribed by the IRS and include the information specified in
paragraph (c)(3)(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 to which the
election applies;
(E) The name and TIN (or alternative form of identification as
prescribed by forms, instructions, or other guidance) of each reviewed
year partner of the partnership;
(F) The current or last address of each reviewed year partner that
is known to the partnership; and
(G) Any other information prescribed by the IRS in forms,
instructions, and other guidance.
(d) Determining an election is invalid. The IRS may determine an
election to be invalid without first notifying the partnership or
providing the partnership an opportunity to correct any failure to
satisfy all of the provisions of this section and Sec. 301.6226-2. 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. The IRS may not determine that an election is invalid
based on errors timely corrected by the partnership in accordance with
Sec. 301.6226-2(d).
(e) 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,
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-
1(a)(6)(ii)) 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).
(f) 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)(iii).
(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, and ending after
August 12, 2018.
(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 301.6226-2 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. A failure to furnish a correct statement in
accordance with this section is subject to penalty under section 6722.
See section 6724(d)(2).
(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 statements described in paragraph (a) of this section to
each reviewed year
[[Page 6550]]
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 and, if a correct address
is identified, mail the statement to the reviewed year partner at the
correct address.
(3) Examples. The following examples illustrate the rules of this
paragraph (b).
(i) 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 that includes 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 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.
(ii) Example 2. The facts are the same as in Example 1 in
paragraph (b)(3)(i) of this section, 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.
(iii) 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 that
includes 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 (or alternative form of identification as
prescribed by forms, instructions, or other guidance) 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
[[Page 6551]]
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
paragraph (f)(1)(ii) or (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-
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 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 of the Internal Revenue
Code. 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. 301.6241-6(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, and ending after
August 12, 2018.
(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. 9. 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 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, nothing in this section entitles any partner to a refund
of chapter 1 tax to which such partner is not entitled. 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
[[Page 6552]]
return filed under section 6225(c)(2) by the reviewed year partner);
plus
(B) Amounts not included in paragraph (b)(2)(ii)(A) of this section
but previously assessed or collected (including the amounts defined in
Sec. 1.6664-2(d) of this chapter and any amounts paid by the partner
in accordance with Sec. 301.6225-2); less
(C) The amount of rebates made (as defined in Sec. 1.6664-2(e) of
this chapter).
(iii) Formulaic expression 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);
C = amounts previously assessed or collected; 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 paragraph (b)(3) of this section.
(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 under section
6225(c)(2) by a reviewed year partner); plus
(B) Amounts not included in paragraph (b)(3)(ii)(A) of this section
but previously or collected (including the amounts defined in Sec.
1.6664-2(d) of this chapter and any amounts paid by the partner in
accordance with Sec. 301.6225-2); less
(C) The amount of rebates made (as defined in Sec. 1.6664-2(e) of
this chapter).
(iii) Formulaic expression 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);
C = amounts previously assessed or collected; 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 under part 1 of this chapter.
(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 (including any 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
[[Page 6553]]
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
(including a pass-through partner (as defined in Sec. 301.6241-
1(a)(5))) 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 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 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. In accordance
with forms, instructions, and other guidance prescribed by the IRS, 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.
(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 (or alternative form of identification as
prescribed by forms, instructions, or other guidance) 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 determined at the audited partnership level 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
[[Page 6554]]
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 of the Internal Revenue
Code. 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-
6(b)(4), and an affected partner must comply with the requirements of
paragraph (f) of this section. For purposes of applying both Sec.
301.6241-6(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 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 a correction amount 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. 301.6241-6(b)(3) applies to the pass-through partner by
substituting ``pass-through partner'' for ``partnership'' where Sec.
301.6241-6(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
[[Page 6555]]
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.
301.6241-6(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. 301.6241-6(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 separate from its owner for Federal income 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, unless otherwise stated, 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,
no penalties, additions to tax, or additional amounts are determined at
the partnership level, all persons are U.S. persons, 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.
(1) 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 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.
(2) 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,
[[Page 6556]]
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.
(3) 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 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. 301.6241-6(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. 301.6241-6(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. 301.6241-6(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. 301.6241-6(b)(4)(i) as a credit under section 33
against C's income tax liability on his 2023 return.
(4) 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 the general imputed underpayment that
resulted from 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. Because E, F, G, and H are
all individuals, 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.
(5) 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
[[Page 6557]]
$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 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 and taking into
account any chapter 1 tax paid with those amended returns. F also
takes into account the interest paid with F's amended returns when
determining the interest under paragraph (c) of this section that
must be paid in the reporting year.
(6) Example 6. Partnership has two equal partners for the 2020
tax year: M (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 M and J each reflect a
partnership adjustment of $250,000 of ordinary income. M takes her
share of the adjustments reflected on the statements furnished by
Partnership into account on M'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
paragraph (b).
(7) 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 a partnership adjustment tracking report and furnishing 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.
(8) 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 $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 a
partnership adjustment tracking report and furnishing a statement to
R. Q timely filed a partnership adjustment
[[Page 6558]]
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. 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. Pursuant to paragraph (e)(1) of this
section, Q files the partnership adjustment tracking report and pay
the amounts due under paragraph (e)(4) of this section by September
15, 2024, the extended due date of Partnership's return for the
adjustment year, 2023. Pursuant to paragraph (e)(4)(v) of this
section, on its 2024 return, the year in which Q made its payment of
the imputed underpayment, Q reports and allocates the $250 capital
loss to its shareholders for its 2024 taxable year as a capital loss
as provided in Sec. 301.6225-3.
(9) 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 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, and ending after
August 12, 2018.
(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 301.6227-1 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. 301.6241-1(a)(6)(ii)) 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 are adjustments described in Sec.
301.6225-1(f)(1) that 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 make a request for an administrative
adjustment of a partnership-related item except in accordance with
Sec. 301.6222-1 or 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.
For rules regarding a notice of change to the amount of creditable
foreign tax expenditures see paragraph (g) of this section.
(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 (including a request filed by a partner in
accordance with Sec. 301.6222-1) 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 by a
partnership, 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 described in Sec. Sec. 301.6223-1 and 301.6223-2).
(2) Contents of AAR filed with the IRS. A partnership must include
the information described in this paragraph (c)(2) when filing an AAR
with the IRS. In the case of a failure by the partnership to provide
the information described in this paragraph (c)(2), the IRS may, but is
not required to,
[[Page 6559]]
invalidate an AAR or readjust any items that were adjusted on the AAR.
An 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 (e)(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. If the
partnership pays an imputed underpayment under Sec. 301.6227-2(b) with
respect to the adjustments requested in the AAR, the reviewed year
partner's share of the adjustments requested in the AAR only includes
any adjustments that did not result in the imputed underpayment, as
determined under Sec. 301.6227-2(a).
(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 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) Administrative proceeding for a taxable year for which an AAR
is filed. Within the period described in section 6235, the IRS may
initiate an administrative proceeding with respect to the partnership
for any partnership taxable year regardless of whether the partnership
filed an AAR with respect to such taxable year and may adjust any
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.
(g) [Reserved]
(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, and ending after
August 12, 2018.
(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 301.6227-2 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 an 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 any imputed underpayment 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 an
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
[[Page 6560]]
account by the partnership--(1) In general. Except in the case of a
valid 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 an imputed underpayment, as well as any
penalties and interest paid by the partnership with respect to an
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 any 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 any 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 an imputed underpayment is
determined under chapter 67 of the Internal Revenue Code 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 date the AAR is filed.
See Sec. 301.6233(a)-1(b). In the case of any failure to pay an
imputed underpayment on the date the AAR is filed, interest is
determined in accordance with section 6233(b)(2) and Sec. 301.6233(b)-
1(c).
(3) Coordination with chapters 3 and 4 of the Internal Revenue
Code--(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. 301.6241-6(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. 301.6241-6(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 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 an 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 that are associated with such imputed underpayment 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 to which the election relates. Rather, each
reviewed year partner must take into account their share of the
adjustments requested in the AAR that are associated with such imputed
underpayment in accordance with Sec. 301.6227-3. If an election is
made under this paragraph (c) with respect to an imputed underpayment,
modifications applied under paragraph (a)(2) of this section to such
imputed underpayment are disregarded and all adjustments requested in
the AAR that are associated with such imputed underpayment 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 any
adjustments requested in an AAR are adjustments that 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 that do not result in an imputed underpayment
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, and ending after
August 12, 2018.
(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 301.6227-3 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)
that either do not result in an imputed underpayment (as described in
Sec. 301.6225-1(f)(1)) or are associated with an imputed underpayment
for which the partnership makes an election under Sec. 301.6227-2(c).
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 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
paragraph (b) of this section.
(i) 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
[[Page 6561]]
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)(1) 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).
(ii) Example 2. The facts are the same as in Example 1 in
paragraph (b)(2)(i) of this section, 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 -$25 ($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 any overpayment.
(c) Reviewed year partners that are pass-through partners--(1) In
general. Except as provided in paragraph (c) of this section, 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
adjustments on a statement received by the pass-through partner under
paragraph (a) or (c)(1) of this section do not result in an imputed
underpayment for the pass-through partner (as described in Sec.
301.6225-1(f)(1)), the pass-through partner must take the adjustments
that do not result in an imputed underpayment into account in
accordance with Sec. 301.6226-3(e)(3). The pass-through partner must
take such adjustments into account under this paragraph (c)(2) even in
situations where the pass-through partner pays an imputed underpayment
in accordance with Sec. 301.6226-3(e)(4)(iii). The pass-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 affected partners (as defined in Sec. 301.6226-3(e)(3)(i)).
(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.
301.6227-1(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 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, and ending after
August 12, 2018.
(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 301.6231-1 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. 301.6241-1(a)(6)(ii)) 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)).
[[Page 6562]]
(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. Except as described in Sec.
301.6223-1(d)(2) and (e)(2), if the IRS withdraws a NAP or NOPPA under
this paragraph (f), the NAP or NOPPA is treated as if it were never
issued, and the withdrawn NAP or NOPPA 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 limitation under Sec.
301.6222-1(c)(5) regarding inconsistent treatment, and 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 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, and ending after
August 12, 2018.
(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 301.6232-1 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. 301.6241-1(a)(6)(ii)) 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
[[Page 6563]]
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 in accordance with 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, and ending after
August 12, 2018.
(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 301.6233(a)-1 is added to read as follows:
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), 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--(1) Interest on an imputed underpayment. 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 paragraph
(b) of this section 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--
(i) The date prescribed for payment (as described in Sec.
301.6232-1(b));
(ii) 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
(iii) The date the imputed underpayment is fully paid.
(2) Interest on penalties with respect to the reviewed year. The
interest imposed on any penalties, additions to tax, and additional
amounts determined under paragraph (c) of this section is the interest
that would be imposed under chapter 67 of the Code treating the
partnership return for the reviewed year as the return of tax with
respect to which such penalty, addition to tax, or additional amount is
imposed.
(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 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. Except as provided in Sec.
301.6225-2(d), a partner-level defense (as described in Sec. 301.6226-
3(d)(3)) may not be raised in a proceeding of the partnership.
(2) Determination of the amount of accuracy-related penalty and
fraud penalty--(i) In general. The amount of any penalty under part II
of subchapter A of chapter 68 of the Code (accuracy-related or fraud
penalties) that relates to any partnership adjustment for the reviewed
year is determined in accordance with this paragraph (c)(2). If in
determining the imputed underpayment under Sec. 301.6225-1 (or Sec.
301.6225-2 in the case of modification), any grouping or subgrouping
contains a negative adjustment (as defined in Sec. 301.6225-
1(d)(2)(ii)) and at least one positive adjustment (as defined in Sec.
301.6225-1(d)(2)(iii)) that is subject to penalty, first apply the
rules for allocating negative adjustments in paragraph (c)(2)(iii) of
this section. Then, apply the rules in paragraph (c)(2)(ii) of this
section to calculate penalty amounts. If there are no negative
adjustments, do not apply the rules in paragraph (c)(2)(iii) of this
section and instead apply only the rules in paragraph (c)(2)(ii) of
this section. For all purposes under paragraph (c)(2) of this section,
adjustments that do not result in the imputed underpayment (as
described in Sec. 301.6225-1(f)) and adjustments excluded from the
determination of the imputed underpayment under Sec. 301.6225-2(b)(2)
are disregarded.
(ii) Calculating the portion of an imputed underpayment subject to
[[Page 6564]]
penalty and penalty amounts. To determine the portion of an imputed
underpayment subject to a penalty and the amount of a particular
penalty, apply the following steps to all adjustments subject to
penalty remaining after application of negative adjustments (as
described in paragraph (c)(2)(iii) of this section) and to all
adjustments subject to penalty contained in groupings or subgroupings
that do not contain a negative adjustment.
(A) For purposes of applying this paragraph (c)(2)(ii)(A),
disregard adjustments to credits or adjustments treated as adjustments
to credits. Total all adjustments to which a particular penalty was
imposed and to which the highest rate of tax in effect for the reviewed
year under section 1 or 11 was applied when calculating the imputed
underpayment. See Sec. 301.6225-1(b)(1)(iv).
(B) Multiply the total in paragraph (c)(2)(ii)(A) of this section
by the highest rate of tax in effect for the reviewed year under
section 1 or 11.
(C) If the imputed underpayment was modified in accordance with
Sec. 301.6225-2(b)(3), repeat the steps in paragraphs (c)(2)(ii)(A)
and (B) of this section for every tax rate applied in calculating the
imputed underpayment by substituting the applicable tax rate determined
under Sec. 301.6225-2(b)(3) for the highest rate of tax in effect for
the reviewed year under section 1 or 11.
(D) Total all amounts determined after completing the steps in
paragraphs (c)(2)(ii)(A) through (C) of this section.
(E) Adjust the amount calculated in paragraph (c)(2)(ii)(D) of this
section by:
(1) Increasing by the net adjustments subject to the penalty in the
credit grouping (as described in paragraph (c)(2)(iii)(C)(1) of this
section) after application of paragraph (c)(2)(iii)(A) of this section;
or
(2) Decreasing in accordance with the rules in paragraph
(c)(2)(iii)(C)(2) of this section by the amount of negative adjustments
in the credit grouping if, after application of paragraph
(c)(2)(iii)(A) of this section, only negative adjustments in the credit
grouping remain.
(3) The result after completing the calculation in paragraphs
(c)(2)(ii)(E)(1) and (2) of this section is the portion of the imputed
underpayment to which the particular penalty was imposed.
(F) Multiply the total calculated in paragraph (c)(2)(ii)(E) of
this section by the penalty rate applicable to the particular penalty.
This is the total penalty amount for adjustments to which the
particular penalty was imposed.
(iii) Allocating negative adjustments--(A) In general. Negative
adjustments offset positive adjustments within the same grouping or, if
the negative adjustment is in a subgrouping, within that same
subgrouping. For purposes of applying this paragraph (c)(2)(iii), all
adjustments to credits and adjustments treated as adjustments to
credits are treated as grouped in the credit grouping without regard to
whether the adjustments were subgrouped for purposes of Sec. 301.6225-
1 (or Sec. 301.6225-2 in the case of modification). Adjustments that
do not result in the imputed underpayment are disregarded as provided
in paragraph (c)(2) of this section. Negative adjustments are allocated
in accordance with the following rules:
(1) Negative adjustments are first applied to offset positive
adjustments to which no penalties have been imposed.
(2) Any amount of negative adjustments remaining after application
of paragraph (c)(2)(iii)(A)(1) of this section are applied to offset
adjustments to which a penalty has been imposed at the lowest penalty
rate.
(3) Any amount of negative adjustments remaining after application
of paragraph (c)(2)(iii)(A)(2) of this section are applied to offset
adjustments to which a penalty has been imposed at the next highest
rate in ascending order of rate until no amount of negative adjustments
remain or no positive adjustments to which a penalty has been imposed
remain.
(B) Allocation of negative adjustment within a penalty rate. The
Internal Revenue Service (IRS) may provide additional guidance
regarding the ordering or allocation of negative adjustments for
purposes of paragraph (c)(2)(iii)(A) of this section where more than
one penalty is imposed at the same penalty rate.
(C) Adjustments remaining after allocation of negative
adjustments--(1) In general. For purposes of paragraph (c)(2)(ii) of
this section, any positive adjustment to which a penalty has been
imposed that has not been fully offset by a negative adjustment after
application of paragraph (c)(2)(iii)(A) of this section is a net
adjustment subject to penalty remaining after allocation of negative
adjustments.
(2) Additional rules regarding allocation of negative credit
amounts. If, after application of paragraph (c)(2)(iii)(A) of this
section, an amount of negative adjustments remain in the credit
grouping, the amount of remaining negative adjustments may reduce the
portion of the imputed underpayment that is subject to a penalty, but
not below zero, in accordance with the following rules:
(i) The amount of remaining negative adjustments in the credit
grouping are first applied to the portion of the imputed underpayment
to which no penalty has been imposed, as calculated in accordance with
paragraph (c)(2)(iii)(C)(3) of this section.
(ii) Any amount of negative adjustment in the credit grouping
remaining after application of paragraph (c)(2)(iii)(C)(2)(i) of this
section is applied to the portion of the imputed underpayment to which
a penalty has been imposed at the lowest penalty rate as calculated in
accordance with paragraph (c)(2)(ii) of this section.
(iii) Any amount of negative adjustments in the credit grouping
remaining after application of paragraph (c)(2)(iii)(C)(1)(ii) of this
section is applied to the portion of the imputed underpayment to which
a penalty has been imposed at the next highest rate in ascending order
of rate in accordance with paragraph (c)(2)(iii) of this section until
no negative amount remains.
(3) Calculating the portion of the imputed underpayment to which no
penalty was imposed before the application of negative adjustments to
credits. To determine the portion of the imputed underpayment that is
not subject to penalty for purposes of paragraph (c)(2)(iii)(C)(2)(i)
of this section, apply the rules in paragraphs (c)(2)(ii)(A) through
(E) of this section of this section but substitute adjustment to which
no penalty was imposed for adjustments to which a particular penalty
was imposed.
(iv) Special rules--(A) 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)(iv)(A) does not apply to
any portion of the imputed underpayment the partnership establishes by
a preponderance of the evidence is not attributable to fraud.
(B) Substantial understatement penalty under section 6662(d)--(1)
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)(2)(iv)(B)(1) 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)(iv)(B)(2) of this section as the tax
[[Page 6565]]
required to be shown on the return for the taxable year under section
6662(d)(1)(A)(i).
(2) Amount of tax required to be shown on the return. The amount
described in this paragraph (c)(2)(iv)(B)(2) 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)).
(C) 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).
(D) 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.
(v) 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.
(A) Example 1. In an administrative proceeding with respect to
Partnership's 2018 partnership return, the IRS makes a positive
adjustment to ordinary income of $100. The $100 adjustment 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 makes a positive adjustment to long-
term capital gain of $300, but no penalty applies with respect to
that adjustment. These are the only adjustments. 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).
(B) Example 2. The facts are the same as in Example 1 in
paragraph (c)(2)(v)(A) of this section, except that the IRS makes a
positive adjustment to credits of $10. The adjustment to 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). 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).
(C) Example 3. The facts are the same as in Example 2 in
paragraph (c)(2)(v)(B) of this section, except that there is also a
negative adjustment to ordinary income of $50 that was subgrouped
under Sec. 301.6225-1 with the $100 positive adjustment to
ordinary. Because the $50 negative adjustment to ordinary income was
subgrouped under Sec. 301.6225-1 with the $100 positive adjustment
to ordinary income, in determining the portion of the imputed
underpayment subject to penalty, the $50 negative adjustment is
applied to offset part of the $100 positive adjustment to ordinary
income ($100-$50 = $50). Accordingly, the portion of the imputed
underpayment to which the 20-percent accuracy-related penalty
applies is $30 (($50 x 40 percent) + $10), and the penalty is $6
($30 x 20 percent).
(D) Example 4. The facts are the same as in Example 3 in
paragraph (c)(2)(v)(C) of this section, 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 portion of the
imputed underpayment to which the 20 percent accuracy-related
penalty applies remains $30, and the 20-percent accuracy-related
penalty remains $6. The portion of the imputed underpayment to which
the 40-percent gross valuation misstatement penalty applies is $120
($300 x 40 percent), and the gross valuation misstatement penalty is
$48 ($120 x 40 percent). The total accuracy-related penalty under
section 6662(a) is $54.
(E) Example 5. 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. In an administrative proceeding with respect to
Partnership's 2019 taxable year, the IRS timely mails a notice of
proposed partnership adjustment (NOPPA) to Partnership for its 2019
taxable year proposing a single partnership positive adjustment to
Partnership's ordinary income by $400,000. The $400,000 positive
adjustment 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 modification request. As a result,
Partnership's total netted partnership adjustment under Sec.
301.6225-1(b)(2) is $300,000 ($400,000 less $100,000 allocable to
C). The imputed underpayment is $120,000 (($300,000) x 40 percent),
and the penalty is $24,000 ($120,000 x 20 percent).
(F) Example 6. The facts are the same as in Example 5 in
paragraph (c)(2)(v)(E) of this section, except in addition to the
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 request. 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, and ending after
August 12, 2018.
(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 301.6233(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 Internal Revenue Service (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
[[Page 6566]]
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, and ending after
August 12, 2018.
(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 301.6234-1 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. In the case of a deposit made under this section that is in
an amount in excess of the amount assessed against the partnership
(excess deposit), a partnership may obtain a return of the excess
deposit by making a request in writing in accordance with forms,
instructions, or other guidance prescribed by the IRS.
(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, and ending after
August 12, 2018.
(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 301.6235-1 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 (d) of this section (regarding extensions), no
partnership adjustment (as defined in Sec. 301.6241-1(a)(6)) for any
partnership taxable year may be made after the later of the date that
is--
(1) 3 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;
(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).
[[Page 6567]]
(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.
(1) 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.
(2) 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.
(3) Example 3. The facts are the same as in Example 2 in
paragraph (e)(2) of this section, except that on June 1, 2023,
pursuant to paragraph (d) of this section, PR signs an agreement
extending the period for making partnership adjustments under
section 6235(a) 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.
(4) Example 4. The facts are the same as in Example 3 in
paragraph (e)(3) of this section, 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.
(5) Example 5. The facts are the same as in Example 4 in
paragraph (e)(4) of this section, 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.
(6) Example 6. The facts are the same as in Example 5 in
paragraph (e)(5) of this section, 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 27, 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 paragraph (b)(1) of this section expires on
November 24, 2026. Because November 24, 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 24, 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, and ending after
August 12, 2018.
(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 301.6241-1 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 (Code) and the regulations in this part under
sections 6221 through 6241 of the 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.
[[Page 6568]]
(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 of the Code, Sec. 301.6225-
1, and, if applicable, Sec. 301.6225-2. 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 income 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 required to file a return under section
6031(a), an S corporation, a trust (other than a wholly-owned trust
disregarded as separate from its owner for Federal income 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 income tax purposes.
(6) Partnership adjustment--(i) In general. The term partnership
adjustment means any adjustment to a partnership-related item and
includes any portion of an adjustment to a partnership-related item.
(ii) Partnership-related item. The term partnership-related item
means--
(A) Any item or amount with respect to the partnership (as defined
in paragraph (a)(6)(iii) of this section) which is relevant in
determining the tax liability of any person under chapter 1 of the Code
(chapter 1) (as defined in paragraph (a)(6)(iv) of this section);
(B) Any partner's distributive share of any such item or amount;
and
(C) Any imputed underpayment determined under subchapter C of
chapter 63 of the Code (subchapter C of chapter 63).
(iii) Item or amount with respect to the partnership. For purposes
of paragraph (a)(6)(ii) of this section, an item or amount is with
respect to the partnership if the item or amount is shown or reflected,
or required to be shown or reflected, on a return of the partnership
under section 6031 or the forms and instructions prescribed by the
Internal Revenue Service (IRS) for the partnership's taxable year or is
required to be maintained in the partnership's books or records. Items
or amounts relating to any transaction with, liability of, or basis in
the partnership are with respect to the partnership only if those items
or amounts are described in the preceding sentence. An item or amount
shown or required to be shown on a return of a person other than the
partnership (or in that person's books and records) that results after
application of the Code to a partnership-related item based upon the
person's specific facts and circumstances, including an incorrect
application of the Code or taking into account erroneous facts and
circumstances of the partner, is not an item or amount with respect to
the partnership. For instance, a deduction shown on the return of a
partner that results after applying a limitation under the Code (such
as section 170(b)) at the partner level to a partnership-related item
based on the partner's facts and circumstances is not an item or amount
with respect to the partnership, even though the corresponding expense
on the return of the partnership is an item or amount with respect to
the partnership. Likewise, an amount on the return of a partner that is
after either an incorrect application of a limitation under the Code or
based on facts and circumstances of the partner that are erroneous, or
both (such as an incorrect application of section 170(b)) at the
partner level to a partnership-related item is not an item or amount
with respect to the partnership. Similarly, a partner's adjusted basis
is not with respect to the partnership because it is an item or amount
shown in the partner's books or records that results after application
of the Code to partnership-related items taking into account the facts
and circumstances specific to that partner.
(iv) Relevant in determining the tax liability of any person under
chapter 1. For purposes of this section, an item or amount with respect
to the partnership is relevant in determining the tax liability of any
person under chapter 1 without regard to the application of subchapter
C of chapter 63 and without regard to whether such item or amount, or
an adjustment to such item or amount, has an effect on the tax
liability of any particular person under chapter 1.
(v) Examples of partnership-related items. The term partnership-
related item includes--
(A) The character, timing, source, and amount of the partnership's
income, gain, loss, deductions, and credits;
(B) The character, timing, and source of the partnership's
activities;
(C) The character, timing, source, value, and amount of any
contributions to, and distributions from, the partnership;
(D) The partnership's basis in its assets, the character and type
of the assets, and the value (or revaluation such as under Sec. 1.704-
1(b)(2)(iv)(f) or (s) of this chapter) of the assets;
(E) The amount and character of partnership liabilities and any
changes to those liabilities from the preceding tax year;
(F) The category, timing, and amount of the partnership's
creditable expenditures;
(G) Any item or amount resulting from a partnership termination;
(H) Any item or amount of the partnership resulting from an
election under section 754;
(I) Partnership allocations and any special allocations; and
(J) The identity of a person as a partner in the partnership.
(vi) 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.
(A) Example 1. Partnership enters into a transaction with A to
purchase widgets for $100 in taxable year 2020. 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 with respect to
Partnership because it is shown on Partnership's return and is
relevant to determining the liability of any person under chapter 1
pursuant to paragraphs (a)(6)(iii) and (iv) 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 (a)(6)(iii) of this section because although the
amount of income relates to a transaction with Partnership and
Partnership is required to show a deduction or expense related to
the payment to A, the amount of income to A is not shown or required
to be shown on Partnership's return. It is only required to be shown
of the return of A, a person other than Partnership and requires
determinations about A's reporting of the item. Accordingly, the
amount of income shown, or required to be shown, by A on his return
is not a partnership-related item.
(B) Example 2. B loans Partnership $100 in Partnership's 2020
taxable year. Partnership makes an interest payment to B in 2020 of
$5. 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 are with respect to Partnership because they were shown
on Partnership's return and are relevant in determining the
[[Page 6569]]
liability of any person under chapter 1 pursuant to paragraphs
(a)(6)(iii) and (iv) 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
(a)(6)(iii) of this section because although they relate to a
transaction with or liability of Partnership and Partnership's
treatment of the loan is shown on Partnership's return, B's
treatment of the loan and the amount of interest income to B are
shown, or required to be shown, on the return of B, a person other
than Partnership and require determinations about B's reporting of
the items. Accordingly, the loan as treated by B and the amount of
interest income to B is not a partnership-related item.
(C) Example 3. On its partnership return for the 2020 tax year,
Partnership reported $200 of non-cash charitable contributions
related to its contribution of merchandise. Partnership has two
equal partners for the 2020 tax year: C and D, both individuals.
Partnership correctly reports $100 in non-cash charitable
contributions to both C and D for the 2020 taxable year. On her
return for the 2020 taxable year, C erroneously deducts the entire
$100 of non-cash charitable contributions, even though C's deduction
for charitable contributions would be limited by section
170(b)(1)(A) to $50 because of C's income. The $100 of non-cash
charitable contribution reported by Partnership to C is a
partnership-related item. However, the amount of the deduction taken
by C on her return for 2020 and the amount of that deduction allowed
after application of the limitation contained in section
170(b)(1)(A) to the $100 in non-cash charitable contributions
reported by Partnership to C is not a partnership-related item under
paragraph (a)(6)(ii) of this section because it is not with respect
to the partnership.
(D) Example 4. The facts are the same as in Example 3 in
paragraph (a)(6)(vi)(C) of this section. On his return for the 2020
taxable year, D also deducts the entire $100 in charitable
contributions but treats the charitable contributions as if they
were cash contributions, instead of non-cash contributions. D does
not file a notice of inconsistent treatment under section 6222. If D
had treated the $100 in charitable contributions as non-cash
contributions, D's deduction for the charitable contributions from
Partnership would have be limited by section 170(b)(1)(A) due to D's
income. D's deduction of the $100 in charitable contributions is an
item or amount shown on D's return, derives from the charitable
contributions reported by the partnership, and is subject to the
application of the limitation under section 170(b)(1)(A). Therefore,
D's deduction is not an item or amount with respect to the
partnership. The charitable contribution reported by the partnership
and its character are items or amounts with respect to the
partnership pursuant to paragraph (a)(6)(iii) of this section. An
adjustment to the character of the contributions is a partnership
adjustment. Because D's treatment of the charitable contributions is
inconsistent with the treatment of that item by Partnership on its
partnership return, the IRS may make that partnership adjustment in
a proceeding with respect to D and determine and assess any
underpayment that results from conforming D's treatment to the
treatment of the contributions by Partnership and applying the limit
in section 170(b)(1)(A). See Sec. 301.6222-1(b).
(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 paragraph
(a)(6)(ii) of this section) 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, and ending after
August 12, 2018.
(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 301.6241-2 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, and ending after
August 12, 2018.
(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 301.6241-3 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.
If the Internal Revenue Service (IRS) determines that any partnership
[[Page 6570]]
(including a partnership-partner as defined in Sec. 301.6241-1(a)(7))
ceases to exist (as defined in paragraph (b) 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) Cease to exist defined--(1) In general. If 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. A failure by the IRS to send a
notification under this paragraph (b)(1) to a former partner of the
partnership does not invalidate the determination by the IRS that the
partnership ceases to exist. If an audited partnership (as defined in
Sec. 301.6226-3(e)(1)) ceases to exist, the IRS will also notify the
partnership representative for the reviewed year. For purposes of this
section, a partnership ceases to exist if the IRS makes a determination
that a partnership ceases to exist because:
(i) The partnership terminates within the meaning of section
708(b)(1); or
(ii) The partnership 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.
(2) Exceptions. For purposes of this section, the IRS will not
determine that a partnership ceases to exist solely because the
partnership has--
(i) A valid election under section 6226 in effect with respect to
any imputed underpayment (as defined in Sec. 301.6241-1(a)(3));
(ii) 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
(iii) Not paid any amount required to be paid under subchapter C of
chapter 63.
(3) 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)(1) of
this section that the partnership ceases to exist.
(4) 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, for a partnership that has
ceased to exist, the partners of the partnership during the adjustment
year (as defined in Sec. 301.6241-1(a)(1)) that corresponds to the
reviewed year for which the adjustments were made.
(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 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 last partnership
taxable year for which the a 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) before the adjustment year and files a final
partnership return for the partnership taxable year of such
partnership, the former partners for purposes of this section are the
partners of the partnership during the partnership taxable year for
which a final partnership return is filed.
(e) Taking adjustments into account--(1) In general. For purposes
of paragraph (a) of this section, a former partner of a partnership
that ceases to exist takes a partnership adjustment into account as if
the partnership had made an election under section 6226 (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.
[[Page 6571]]
(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).
(1) 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 Partnership does not have
the ability to pay under paragraph (b)(1)(ii) 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.
(2) 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 P does not have the ability to pay under paragraph
(b)(1)(ii) 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)(1)(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, and ending after
August 12, 2018.
(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 301.6241-4 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 (Code) for any payment required to be
made by a partnership under subchapter C of chapter 63 of the 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, and ending after
August 12, 2018.
(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 301.6241-5 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) 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. 301.6241-1(a)(6)(ii)) 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 for
such taxable year.
(b) Partnership return filed but no entity found to exist.
Paragraph (a) of this section also applies where a partnership return
is filed for a taxable year, but the IRS determines that no entity
existed at all for such taxable year. For purposes of applying
paragraph (a) of this section, the partnership return is treated as if
it were filed by an entity.
(c) Exceptions. Paragraph (a) of this section does not apply to--
(1) 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 valid section 761(a) election is
made (regarding election out of subchapter K of chapter 1 of the
Internal Revenue Code for certain unincorporated organizations).
[[Page 6572]]
(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, and ending after
August 12, 2018.
(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 301.6241-6 is added to read as follows:
Sec. 301.6241-6 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. 301.6241-1(a)(6)(ii)) 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
paragraph (a) of this section 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.
(i) 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. 301.6241-1(a)(6)(ii).
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.
(ii) 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 the Code, but does not include section 1443(b) of the Code.
(iii) Chapter 4. The term chapter 4 means sections 1471 through
1474 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
[[Page 6573]]
under chapter 3 or chapter 4 on the amount of any adjustment set forth
in 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. Sec. 1.1446-3(d)(1)(iii); 1.1461-1(b), (c); and 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, and ending after
August 12, 2018.
(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.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
Approved: December 17, 2018.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2018-28140 Filed 2-21-19; 11:15 am]
BILLING CODE 4830-01-P
