Treatment of Special Enforcement Matters, 75473-75495 [2022-26783]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 87, Number 236 (Friday, December 9, 2022)]
[Rules and Regulations]
[Pages 75473-75495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26783]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9969]
RIN 1545-BP01


Treatment of Special Enforcement Matters

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that except certain 
partnership-related items from the centralized partnership audit regime 
created by the Bipartisan Budget Act of 2015, and sets forth 
alternative rules that will apply to the examination of excepted items 
by the IRS. The centralized partnership audit regime does not apply to 
a partnership-related item if the item involves a special enforcement 
matter described in these regulations. Additionally, these regulations 
make changes to the existing centralized partnership audit regime 
regulations to account for changes to the Internal Revenue Code (Code) 
as well as changes that clarify those regulations. The regulations 
affect partnerships and partners to whom special enforcement matters 
apply.

DATES: 
    Effective date: These regulations are effective on December 9, 
2022.
    Applicability date: For dates of applicability, see Sec. Sec.  
301.6221(b)-1(f); 301.6225-1(i)(1); 301.6225-2(g)(1); 301.6225-3(e)(1); 
301.6226-2(h)(1); 301.6241-3(g); 301.6241-7(j)

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

SUPPLEMENTARY INFORMATION: 

Background

    This document contains final amendments to the Procedure and 
Administration Regulations (26 CFR part 301) regarding special 
enforcement matters under section 6241(11) of the Code and the 
collection of amounts due under the centralized partnership audit 
regime pursuant to section 6241(7) of the Code. Section 6241(11) was 
enacted by section 206 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). This document also contains 
several amendments to the final regulations on the centralized 
partnership audit regime published in TD 9844 (84 FR 6468) on February 
27, 2019.
    Section 1101(a) of the Bipartisan Budget Act of 2015, Public Law 
114-74 (BBA) amended chapter 63 of the Code (chapter 63) by removing 
former subchapter C of chapter 63 effective for partnership taxable 
years beginning after December 31, 2017. Former subchapter C of chapter 
63 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 removed 
subchapter D of chapter 63 and amended chapter 1 of the Code (chapter 
1) by removing part IV of subchapter K of chapter 1, 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 Protecting Americans from Tax Hikes Act 
of 2015, Public Law 114-113 (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.
    Enacted on March 23, 2018, the TTCA made a number of technical 
corrections to the centralized partnership audit regime, including 
adding sections 6241(11) (regarding the treatment of special 
enforcement matters) and 6232(f) (regarding the collection of the 
imputed underpayment and other amounts due from partners of the 
partnership in the event the amounts are not paid by the partnership) 
to the Code. The amendments to subchapter C of chapter 63 included in 
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 January 2, 2018, the Department of the Treasury (Treasury 
Department) and the IRS published in the Federal Register (82 FR 28398) 
final regulations under section 6221(b) providing rules

[[Page 75474]]

for electing out of the centralized partnership audit regime (TD 9829).
    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.
    On February 27, 2019, the Treasury Department and the IRS published 
in the Federal Register (84 FR 6468) final regulations implementing 
sections 6221(a), 6222, and 6225 through 6241 of the centralized 
partnership audit regime (TD 9844).
    On November 24, 2020, the Treasury Department and the IRS published 
in the Federal Register (85 FR 74940) a notice of proposed rulemaking 
(REG-123652-18) (November 2020 NPRM) proposing rules to implement 
section 6241(11) dealing with special enforcement matters and to make 
changes to the regulations under the centralized partnership audit 
regime. The Treasury Department and the IRS received written public 
comments in response to the regulations proposed in the November 2020 
NPRM, and a public hearing regarding the proposed regulations was held 
on March 25, 2021.
    After careful consideration of all written public comments received 
in response to the November 2020 NPRM as well as statements made during 
the public hearing, the November 2020 NPRM is adopted with the 
revisions described in the preamble to this Treasury Decision in 
response to those comments and statements.

Summary of Comments and Explanation of Revisions

    Three written comments were received in response to the November 
2020 NPRM. Two statements were made at the public hearing held on March 
25, 2021. 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 made to correct typographical errors and grammatical 
mistakes. 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. Finally, the Treasury Department and the IRS have decided 
not to finalize the proposed changes to Sec.  301.6241-3(d) and plan to 
withdraw the proposed changes.

1. Applicability Date

    Two comments were received regarding the applicability date of 
clarifications that were made to the rules regarding elections out of 
the centralized partnership audit regime. Proposed Sec.  301.6221(b)-
1(f) provided that all proposed adjustments to Sec.  301.6221(b)-1 
would be applicable as of November 20, 2020, the date the November 2020 
NPRM was filed for public inspection with the Federal Register. The 
November 2020 NPRM proposed the addition of qualified subchapter S 
subsidiaries (QSubs) as an additional example of partner to be added to 
the list of ineligible partners under Sec.  301.6221(b)-1(b)(3)(ii). 
One comment noted that while this additional example of ineligible 
partner was included in Notice 2019-06, 2019-03 IRB 353 (January 14, 
2019) announcing forthcoming proposed regulations, Notice 2019-06 also 
included a rule for partnerships with QSub partners similar to the rule 
for partnerships with S corporation partners under section 
6221(b)(2)(A), but the proposed rule in the November 2020 NPRM did not 
propose the rule previously described in Notice 2019-06. Both comments 
recommended that the applicability date for this additional example of 
ineligible partner should therefore not be November 20, 2020, but 
should be applicable for partnership tax years ending after the date 
the final rule is finalized and published in the Federal Register to 
allow partnerships with QSub partners time to restructure if desired.
    These comments are not adopted. The November 2020 NPRM did propose 
rules that were not identical to the rules previously described in 
Notice 2019-06, which is one reason the November 2020 NPRM did not 
propose, pursuant to section 7805(b)(1)(C) of the Code, an 
applicability date of January 14, 2019, the day that Notice 2019-06 was 
issued. However, pursuant to section 7805(b)(1)(B) the November 2020 
NPRM proposed an applicability date of November 20, 2020, the date that 
the November 2020 NPRM was filed with the Federal Register. The 
originally proposed applicability date of November 20, 2020, would have 
little or no effect on taxpayers, whereas changing the proposed 
applicability date to the date that this Treasury decision is published 
in the Federal Register creates an administrative burden for the IRS. 
The only possible effect on taxpayers is that they may be subject to 
the centralized partnership audit procedures if they are selected for 
examination by the IRS and it may require them to file an 
administrative adjustment request (AAR) under section 6227 of the Code 
in lieu of an amended Form 1065. For the IRS, absent this rule being 
applicable on the proposed applicability date of November 20, 2020, 
there would be uncertainty regarding whether the centralized 
partnership audit regime applies to any partnership that has a QSub as 
a partner during the period beginning on November 20, 2020, and ending 
on the date of publication of this Treasury decision in the Federal 
Register. This uncertainty could cause significant delays that hinder 
the IRS's ability to examine these partnerships in a timely and 
efficient fashion. By retaining the earlier proposed applicability date 
of November 20, 2020, the final regulations provide certainty for both 
the IRS and taxpayers.
    One comment was received regarding the applicability dates for the 
proposed regulations under Sec. Sec.  301.6225-1, 301.6225-2, 301.6226-
2, 301.6241-3, and 301.6241-7 in the November 2020 NPRM. The proposed 
regulations proposed that the majority of the proposed rules would be 
applicable on November 20, 2020, the date the November 2020 NPRM was 
filed with the Federal Register. In contrast, proposed Sec.  301.6241-
7(b) would be applicable for partnership taxable years beginning on or 
after December 20, 2018, the date Notice 2019-06 was published. 
Although the comment noted that, under section 7805(b)(1), the final 
regulations could be applicable to partnership taxable years ending on 
or after November 20, 2020, or on or after December 20, 2018, for Sec.  
301.6241-7(b), the comment recommended that all of the final 
regulations be applicable to partnership taxable years ending after the 
date the final rules are published in the Federal Register. The comment 
suggests that this delay would give partnerships sufficient time after 
the rules are finalized to adjust their internal tax compliance and 
reporting procedures as well as review their existing partnership 
agreements to account for the final rules.
    The comment recommended that the majority of the final regulations 
that were proposed in the November 2020 NPRM be applicable on the date 
the final regulations are published in the Federal Register, but the 
comment also recommended more specific changes to

[[Page 75475]]

some of the applicability dates. Under proposed Sec.  301.6241-3(g), 
the changes to Sec.  301.6241-3 were proposed to be applicable to any 
determinations made on or after November 20, 2020. The comment stated 
that the rules under proposed Sec.  301.6241-3 could not, under section 
7805(b)(1), be applicable for determinations on or after November 20, 
2020, because then the rule would apply to taxable years ending prior 
to November 20, 2020, which the comment said was not consistent with 
section 7805(b)(1) as it provides that, except as otherwise provided, 
``no temporary, proposed, or final regulation relating to the internal 
revenue laws shall apply to any taxable period ending before the 
earliest of'' certain dates, in this case the date on which the 
proposed regulations were filed with the Federal Register.
    The final rules under Sec.  301.6241-7, except for Sec.  301.6241-
7(b), were proposed to be applicable for taxable years beginning on or 
after November 20, 2020, but also to any examinations or investigations 
beginning after November 20, 2020. Similar to the comment regarding the 
applicability of proposed Sec.  301.6241-3, the comment recommended 
that the applicability date provision be removed as the comment noted 
that this would allow the final regulations to be applicable to taxable 
years ending before November 20, 2020, including taxable years 
beginning prior to the applicability date of the centralized 
partnership audit regime. The comment noted that although section 
7805(b)(1)(C) permitted the final regulations to be applicable to 
taxable years ending no earlier than the date Notice 2019-06 was 
published, as it substantially described the expected contents of the 
final regulations, the commenter felt as if this would not be within 
the ``spirit'' of section 7805(b) given that over two years have passed 
since Notice 2019-06 was published and could result in the provisions 
being applied to examinations already in progress.
    As the comment acknowledged, section 7805(b) provides that ``no 
temporary, proposed, or final regulation relating to the internal 
revenue laws shall apply to any taxable period ending before the 
earliest of the following dates'': the date on which the final 
regulations are filed with the Federal Register, the date on which the 
proposed regulations were filed with the Federal Register, or the date 
on which a notice substantially describing the expected contents of the 
final regulations was issued to the public. As with the amendments to 
the rules under Sec.  301.6221(b)-1, delaying the applicability date of 
proposed Sec. Sec.  301.6225-1, 301.6225-2, 301.6226-2, 301.6241-3, and 
301.6241-7 could hinder the IRS's ability to conduct examinations in a 
timely and efficient manner and to utilize the assessment rules of 
section 6232(f) for partnerships that fail to pay imputed 
underpayments. It also could cause uncertainty for partnerships who may 
have chapter 1 liabilities, adjustments to non-income items that do not 
result in an imputed underpayment, or for partnerships that have 
arranged their affairs to be consistent with Notice 2019-06 and the 
proposed regulations.
    Partnerships were notified of these proposed regulations on 
November 20, 2020, and on December 20, 2018, for the rules in proposed 
Sec.  301.6241-7(b). As the comment correctly noted, for the provisions 
in proposed Sec.  301.6241-7(b), partnerships have had well over two 
years to adjust their affairs in anticipation of the final regulations. 
For the other regulations, partnerships have had since November 20, 
2020, to arrange their affairs to account for the final regulations. 
The Treasury Department and the IRS have determined that the 
administrative burden placed on the IRS in not being able to utilize 
final procedural rules (that is, rules not affecting the determination 
of underlying tax liabilities) as soon as possible far outweighs giving 
partnerships additional time to implement changes to account for 
procedural rules the general substance of which they have been aware of 
since November 20, 2020. Therefore, the suggestion to make the 
regulations applicable as of the date the final regulations are 
published in the Federal Register is not adopted.
    In addition, although the comment expressed concerns that the final 
regulations could apply to taxable years beginning before the 
applicability date of the centralized partnership audit regime, this 
concern is unfounded. The centralized partnership audit regime does not 
apply to taxable years beginning prior to January 1, 2018, for which an 
election under Sec.  301.9100-22 was not made. If the centralized 
partnership audit regime does not apply to a partnership for a 
particular taxable year, then these regulations, which clarify the 
application of the centralized partnership audit regime, are irrelevant 
to the examination of that particular partnership's taxable year.
    As previously noted, the comment also expressed concern that the 
applicability of the regulations could apply to taxable years prior to 
the date the November 2020 NPRM was filed with the Federal Register as 
the regulations were proposed to be applicable to any examinations or 
investigations beginning after November 20, 2020, the date the November 
2020 NPRM was filed with the Federal Register. This Treasury decision 
adopts this comment. Accordingly, the applicability dates have been 
modified to remove the provision that applied the regulations to 
examinations or investigations beginning after November 20, 2020, and 
to clarify that the final regulations apply to taxable years ending on 
or after November 20, 2020, or taxable years beginning after December 
20, 2018, in the case of the final regulations in Sec.  301.6241-7(b).
    In the November 2020 NPRM, the applicability date in proposed Sec.  
301.6241-7(j)(1) provided that the IRS and a partner under examination 
could agree to apply any provision (except Sec.  301.6241-7(b)) to 
taxable years prior to the general applicability date. The Treasury 
Department and the IRS have decided that partnerships should also have 
the flexibility to agree to apply Sec.  301.6241-7(g) (chapter 1 taxes 
and penalties that are the liability of the partnership) prior to the 
general applicability date as well. This may be especially beneficial 
for partnerships in situations where the IRS proposes to reduce a 
chapter 1 tax or penalty reported by the partnership. Accordingly, 
Sec.  301.6241-7(j)(1) is updated to provide that the IRS and the 
partnership may agree to apply Sec.  301.6241-7(g) for taxable years 
ending prior to November 20, 2020, provided that taxable year is 
otherwise subject to the centralized partnership audit regime.

2. Adjustments to Non-Income Items

A. Taking Into Account Adjustments to Non-Income Items That Are 
Adjustments That Do Not Result in an Imputed Underpayment
    Under section 6241(2)(B) and Sec.  301.6241-1(a)(6)(ii), the term 
``partnership-related item'' includes items or amounts ``relating to 
any transaction with, basis in, or liability of the partnership.'' 
Accordingly, the definition of ``partnership-related item'' includes 
items that are not items of income, gain, loss, deduction, or credit 
(non-income items). As defined in Sec.  301.6225-1(d)(2)(iii) prior to 
the November 2020 NPRM, a positive adjustment is any adjustment that is 
not a negative adjustment as defined in Sec.  301.6225-1(d)(2)(ii). A 
negative adjustment is any adjustment that is a decrease in an item of 
income (or treated as a decrease in an item of income), or an increase 
to an item of credit. An adjustment to an item that is

[[Page 75476]]

a non-income item is not a decrease in an item of income. Therefore, 
adjustments to a partnership's non-income items are always positive 
adjustments, are never negative adjustments, and are not netted against 
any adjustments to a partnership's items of income, gain, loss, 
deduction, or credit under section 702(a). Therefore, adjustments to a 
partnership's non-income items are adjustments that do not result in an 
imputed underpayment in situations where a net negative adjustment to a 
credit, or an item treated as a credit, reduces the imputed 
underpayment to zero or less than zero. Under proposed Sec.  301.6225-
3(b)(8), if an adjustment to a non-income item is an adjustment that 
does not result in an imputed underpayment, the partnership takes this 
adjustment into account on its adjustment-year return by adjusting the 
non-income item consistently with the adjustment, to the extent the 
non-income item appears on the adjustment-year return without regard to 
the adjustment.
    Two comments were received regarding the rules for taking into 
account adjustments to non-income items in the partnership's adjustment 
year in situations where the adjustments to non-income items are 
adjustments that do not result in an imputed underpayment under 
proposed Sec.  301.6225-3(b)(8). Both comments expressed concern that 
including an adjustment to a non-income item, such as an asset, in the 
imputed underpayment could result in recognition of gain, in the form 
of the imputed underpayment on the adjustment, prior to the disposition 
of the asset. One comment also expressed concern that it could result 
in double tax in situations where a non-income item is adjusted at the 
partnership level under the centralized partnership audit regime and at 
the partner level in situations where a special enforcement provision 
is utilized. According to the comment, the double tax would occur 
because the partner would pay tax on the adjustment in the partner-
level proceeding and the partnership would pay an imputed underpayment 
on the same adjustment in a partnership examination. The comment noted 
that it was unclear whether the partnership must also recognize gain on 
that adjustment in addition to adjusting the non-income item on the 
partnership's adjustment year return. One of the comments recommended 
removing proposed Sec.  301.6225-3(b)(8) in its entirety. However, the 
comment seemed to focus primarily on the inclusion of non-income items 
in the calculation of the imputed underpayment, which is not something 
that is the subject of proposed Sec.  301.6225-3(b)(8). Therefore, that 
comment's concerns on that issue are addressed more fully in section 
2.B of this preamble.
    One of the comments also requested that the rule be clarified to 
note that the partnership would not recognize gain in the adjustment 
year as a result of taking into account the adjustment to the non-
income item that was an adjustment that did not result in an imputed 
underpayment. Finally, one comment requested that cross-references in 
the example be changed to refer to Sec. Sec.  301.6225-1(d) and (f) in 
their entirety and requested additional examples illustrating how other 
adjustments to non-income items are taken into account on the 
adjustment year return.
    With regard to the comment's concern about the potential for double 
tax, if an item is adjusted both in an examination of the partnership 
and of a partner, Sec.  301.6241-7(i) provides that an item will not be 
adjusted at the partner level if the partner can demonstrate that the 
adjustment was previously taken into account by the person in an 
examination under the centralized partnership audit regime (for 
example, by filing an amended return as part of a request to modify the 
imputed underpayment). Also, an item will not be adjusted at the 
partner level if the partner demonstrates that the adjustment was 
included in an imputed underpayment paid by the partnership or pass-
through partner for a taxable year in which the partner was a reviewed 
year partner but only to the extent the adjustment exceeds the original 
amount reported by the partnership to the partner (that is, the partner 
needs to have reported the original amounts from the partnership 
first). In addition, if the partner-level proceeding concludes prior to 
the partnership-level proceeding, the partnership may request 
modification of the imputed underpayment for any adjustment previously 
taken into account at the partner level. Accordingly, in situations 
where an item is adjusted both in a partner-level examination and a 
partnership-level examination, the adjustments will not result in 
double tax because these rules provide for the exclusion of any 
potential double tax in the examination that concludes later.
    The comments also had concerns about gain recognition as a result 
of adjusting the non-income item in the adjustment year when the 
adjustment is an adjustment that does not result in an imputed 
underpayment. There is nothing in the centralized partnership audit 
regime that would require the partnership to recognize gain in the 
adjustment year when the partnership adjusts a non-income item as a 
result of taking into account adjustments that do not result in an 
imputed underpayment.
    Proposed Sec.  301.6225-3(b)(8) provides that the partnership takes 
an adjustment to a non-income item into account by adjusting the non-
income item on its adjustment year return. As the example in proposed 
Sec.  301.6225-3(d)(3) demonstrated, in the case of an adjustment to 
the basis of an asset, the partnership would adjust its basis in the 
asset in the adjustment year. To avoid confusion, the example has been 
modified to clarify that the reduction in the basis of the asset only 
requires the partnership to recognize income or gain in situations 
where income and gain would be recognized. One comment also requested 
additional examples demonstrating how adjustments to other items such 
as liabilities and capital account adjustments are taken into account. 
In response to the comment, Example 4 is added to Sec.  301.6225-3(d) 
to demonstrate how adjustments to liabilities are taken into account 
when they are adjustments that do not result in an imputed 
underpayment. Another example, Example 5, is also added to Sec.  
301.6225-3(d) in response to the public comment to demonstrate how 
filing an amended return as part of modification applies when there are 
adjustments to non-income items. In addition, the recommendation that 
the cross-references in the example be modified is also adopted and the 
cross-references are changed where they appear in the example.
    One comment expressed concern about how partnerships would be able 
to comply with proposed Sec.  301.6225-3(b)(8) when filing their 
adjustment year returns. The comment noted that partnerships have 
different software, advisors, and levels of sophistication and, 
therefore, the rule might not be consistently applied among 
partnerships. The comment expressed a concern that proposed Sec.  
301.6225-3(b)(8) does not provide a clear and administrable standard as 
to when to include a non-income item adjustment on the partnership's 
adjustment year return. The comment expressed concern that taking into 
account adjustments to non-income items on the partnership's adjustment 
year return could preclude items that otherwise could never be reported 
and provided examples of items under section 199A.
    Proposed Sec.  301.6225-3(b)(8) endeavors to provide clear, bright-
line rules on how to account for adjustments to non-income items that 
must be taken

[[Page 75477]]

into account on the partnership's adjustment year return because they 
did not result in an imputed underpayment. Proposed Sec.  301.6225-
3(b)(8) provides rules on what to do if the non-income item is still 
included on the partnership's adjustment year return and rules for what 
happens if it is not included, as well as an example of how the rule 
works. The nature of non-income items precludes a regulation that could 
individually account for all types of non-income items because non-
income items by their definition vary widely. To encompass all the 
types of non-income items that could be adjusted in the centralized 
partnership audit regime, it is necessary for the rule to be broad and 
apply to numerous types of non-income items. Although the Treasury 
Department and the IRS take seriously concerns regarding inconsistent 
application of provisions, varying levels of sophistication, and 
differences in interpretation of statutes or regulations by software or 
advisors, proposed Sec.  301.6225-3(b)(8) provides necessary guidance 
to taxpayers while appropriately balancing administrability concerns.
    The comment about whether proposed Sec.  301.6225-3(b)(8) would 
preclude the reporting of some items is unclear. If an adjustment is an 
adjustment that does not result in an imputed underpayment, it is 
required to be taken into account on the partnership's adjustment year 
return under section 6225(a)(2). Therefore, those adjustments are 
accounted for on the adjustment year return.
    As non-income items are required to be included in the calculation 
of the imputed underpayment, there must be rules regarding how to take 
those adjustments into account on the adjustment year return if they 
are adjustments that do not result in an imputed underpayment. Without 
the rule contained in proposed Sec.  301.6225-3(b)(8), partnerships 
would be left with no guidance as to how or when to take those 
adjustments into account. For this reason and for all the previous 
reasons, the recommendation to remove proposed Sec.  301.6225-3(b)(8) 
is not adopted.
    One comment requested an example demonstrating how adjustments to 
capital accounts are taken into account if they are adjustments that do 
not result in an imputed underpayment. These regulations do not address 
any effect on partner basis and capital accounts. As a result, the 
comment is beyond the scope of these regulations.

B. Adjustments to Non-Income Items in the Calculation of the Imputed 
Underpayment

    Section 6225 provides specific rules on how to compute the imputed 
underpayment, which is a liability of the partnership. Under section 
6225(b), if adjustments are made to a partnership-related item, those 
adjustments are appropriately netted, and the highest rate under 
section 1 or 11 is applied as part of the calculation of the imputed 
underpayment. Non-income items are included in the definition of 
``partnership-related item.'' See section 6241(2)(B)(i) (noting that a 
partnership-related item includes any item or amount relating to 
liabilities of the partnership); Sec.  301.6241-1(a)(6)(v)(C), (D), and 
(E). Accordingly, as non-income items are partnership-related items, 
adjustments to non-income items are appropriately included in the 
calculation of the imputed underpayment as section 6225 does not limit 
which adjustments to partnership-related items are included in the 
calculation.
    The November 2020 NPRM did not propose any changes to the 
definition of positive adjustments in Sec.  301.6225-1(d)(2)(iii), to 
the formula for calculating the imputed underpayment under Sec.  
301.6225-1(b), or to Sec.  301.6225-1(a)(1), which provides that all 
adjustments to partnership-related items are included in the 
calculation of the imputed underpayment. In addition, no changes were 
proposed to the definition of partnership-related item in Sec.  
301.6241-1(a)(6)(ii), which includes examples of non-income items as 
partnership-related items. Accordingly, comments regarding whether a 
non-income item should be included in the calculation of the imputed 
underpayment are outside the scope of this regulation and any changes 
to those provisions would need to be proposed in a separate NPRM. 
However, the Treasury Department and the IRS have attempted to respond 
to the comments on this issue within the scope of the November 2020 
NPRM.
    Two comments were received on the inclusion of non-income items in 
the calculation of the imputed underpayment. Both comments recommended 
that all adjustments to non-income items should not be taken into 
account in determining whether there is an imputed underpayment or that 
the adjustment to the non-income items should be treated as zero in the 
computation.
    One comment expressed a concern that including adjustments to non-
income items in the calculation of the imputed underpayment would fail 
to reflect accurately the tax impacts of the adjustments and that the 
imputed underpayment could be far greater than the partners' aggregate 
chapter 1 tax liability, which the comment said the imputed 
underpayment is intended to approximate. The comment said this 
discrepancy would discourage partnerships from filing administrative 
adjustment requests (AARs) especially given that more and more items 
are being reported by partnerships. The comment expressed concern that 
the ability to push out the adjustments under section 6226 does not 
mitigate or alleviate these concerns.
    Both comments expressed concern that an adjustment to a non-income 
item, such as an adjustment to the basis of an asset, could give rise 
to a taxable adjustment without a corresponding disposition, 
realization, or recognition event upon which gain or loss would be 
determined. One comment also had concerns that including an adjustment 
to a non-income item in the imputed underpayment would effectively 
require the partnership to recognize gain prior to when the partnership 
would otherwise be required to recognize gain under the Code. One 
comment stated that there is nothing in the Code or in the legislative 
history of the centralized partnership audit regime that would indicate 
Congress intended that the IRS could cause a recognition event where 
one had not occurred. The Treasury Department and the IRS note that 
there is no legislative history of subchapter C of chapter 63 but agree 
that there is nothing in subchapter C of chapter 63 that specifically 
mentions recognition events. However, as discussed later, under the 
centralized partnership audit regime, the inclusion of an adjustment to 
a non-income item in an imputed underpayment is not, and does not 
require, a recognition event.
    With regard to the comment that the tax is paid early on non-income 
items, the comment is correct that, by paying an imputed underpayment 
on an adjustment to a non-income item, in some circumstances the 
partnership will effectively pay a tax on the change in the non-income 
item in situations where the partnership would not yet have recognized 
income aside from the partnership examination. Under section 6225, the 
partnership is liable for an imputed underpayment on any adjustments to 
partnership-related items, which is defined under section 6241 as any 
item with respect to the partnership that is relevant to determining 
the tax liability of any person under chapter 1 of the Code, including 
a liability of the partnership.

[[Page 75478]]

    Accordingly, the imputed underpayment under the centralized 
partnership audit regime is not designed to be the exact amount of the 
tax liability that would have been paid by the partners, nor is it a 
substitute for partner tax liability. Rather, it is an entity-level 
liability of the partnership alone computed by reference to any 
adjustments made to partnership-related items, regardless of whether 
those adjustments would have actually resulted in a tax liability to 
any particular partner. Therefore, given that adjustments are made to a 
specific taxable year, the adjustments could result in an imputed 
underpayment in situations where no income would have been recognized 
if the item had been correctly reported originally. But the adjustments 
and the imputed underpayment are not themselves realization or 
recognition events; they are adjustments to partnership-related items 
that are taken into account in calculating an imputed underpayment 
under the centralized partnership audit regime.
    To provide the partnership with an opportunity to mitigate any 
inconsistency that may result with the computation of the imputed 
underpayment, the partnership can request to modify the imputed 
underpayment or may elect to push out the adjustments to its reviewed 
year partners. When taking into account an adjustment to a non-income 
item as part of filing of an amended return or calculating the 
additional reporting year tax under section 6226, an adjustment to a 
non-income item would only result in additional tax if that adjustment 
would have resulted in additional tax on the partner's original tax 
return had the item been correctly reported by the partnership on its 
original return for the reviewed year or any intervening year. For 
example, assume the basis in an asset was adjusted and, subsequent to 
the reviewed year but prior to the adjustment year, a partner received 
that asset in a distribution and disposed of that asset. In that case, 
an adjustment to the partnership's basis in an asset may affect the 
amount of tax the partner would have paid if the item had been 
correctly reported. As a result, in this example, the additional 
reporting year tax for that partner likely would be affected by the 
basis adjustment.
    As mentioned previously, two comments requested that adjustments to 
non-income items be excluded from the calculation of the imputed 
underpayment or that those adjustments be treated as zero. As 
previously discussed, the imputed underpayment is an entity-level 
liability calculated on all of the adjustments to partnership-related 
items, and the highest rate is applied regardless of what the tax 
consequences would have been had the partners correctly taken into 
account the adjustments in the reviewed year. As a result, in some 
instances the centralized partnership audit regime shifts an 
adjustment, and its tax consequences, into a different year than the 
year to which the adjustment relates. For example, adjustments that do 
not result in an imputed underpayment are taken into account in the 
adjustment year instead of the reviewed year. In other words, there are 
many aspects of the centralized partnership audit regime enacted by 
Congress that result in income, gain, loss, deduction, or credit, and 
any taxes on those items, being recognized or taken into account in 
taxable years other than in the taxable year where the item would have 
been reported if the centralized partnership audit regime did not 
apply.
    To alleviate this difference, the centralized partnership audit 
regime offers partnerships choices that would modify or eliminate the 
imputed underpayment and would make the underpayment amount closer to 
the amount of tax that would have been paid if the partners had 
reported the proper amounts of items in the correct taxable year. For 
example, the partnership may request modification of the imputed 
underpayment, including modification of any adjustments that do not 
result in an imputed underpayment, or may elect to push out the 
adjustments to its reviewed year partners under section 6226. In 
addition, Sec.  301.6225-1(b)(4) provides that the IRS and partnerships 
may treat an adjustment as zero solely for purposes of calculating the 
imputed underpayment in situations where multiple positive adjustments 
are related to, or result from, one another. Therefore, the 
recommendation to remove adjustments of non-income items from the 
calculation of the imputed underpayment or to treat those adjustments 
as zero in calculating the imputed underpayment in all situations is 
not adopted.
    In addition to the comments on the inclusion of non-income items in 
the calculation of the imputed underpayment, one comment was received 
on proposed Sec.  301.6225-1(b)(4), which provides the rules for 
treating an adjustment as zero solely for purposes of computing the 
imputed underpayment in certain situations. The comment recommended 
extending the rule in proposed Sec.  301.6225-1(b)(4), that allows one 
adjustment to be treated as zero solely for purposes of calculating the 
imputed underpayment, if the adjustment is related to or results from 
an adjustment to an item of income, gain, loss, deduction, or credit to 
persons other than the IRS. As stated in the preamble to the November 
2020 NPRM, the sentence added to Sec.  301.6225-1(b)(4) that provides 
that a partnership may treat an adjustment to a non-income item as zero 
for purposes of computing the imputed underpayment was proposed to be 
expanded to provide for a broader application, including to allow 
partnerships to utilize this rule.
    In response to the comment that the language is unclear, the 
language of proposed Sec.  301.6225-1(b)(4) is modified to clarify that 
this provision applies to both the IRS and partnerships, and the rule 
has been broadened further. As modified, Sec.  301.6225-1(b)(4) as set 
forth in this Treasury decision provides that if any positive 
adjustment is related to, or results from, a second positive 
adjustment, a partnership may treat one of the positive adjustments as 
zero solely for purposes of computing the imputed underpayment unless 
the IRS determines that the adjustment should not be treated as zero. 
With this change, a partnership may treat an adjustment to a non-income 
item as zero if the adjustment to the non-income item is related to, or 
results from, another adjustment to a non-income item. However, this 
rule does not allow the partnership to treat an adjustment as zero if 
one adjustment is positive and one is negative. For example, if a 
partnership changes an ordinary loss to a capital loss, which results 
in a positive adjustment to ordinary income and a negative adjustment 
to capital loss, the partnership could not treat the negative 
adjustment to capital loss as zero for purposes of calculating the 
imputed underpayment. This change provides more relief to partnerships 
and more closely aligns with the intended purpose of this rule.
    One comment recommended that the phrase ``unless the IRS determines 
that the adjustment should be included in the imputed underpayment'' be 
removed from Sec.  301.6225-1(b)(4). It is unclear whether this 
recommendation was made to provide clarity that the provision also 
applied to determinations made by partnerships or if this 
recommendation was in addition to that comment. To the extent the 
comment was about clarifying that Sec.  301.6225-1(b)(4) applied to 
determinations made by partnerships as well as the IRS, as discussed 
previously, additional language has been added to the provision to make 
this clear. To the extent that this comment is an additional 
recommendation, the

[[Page 75479]]

comment is not adopted. Because partnerships may treat an adjustment as 
zero for purposes of calculating the imputed underpayment, there may be 
times when the partnership should not have treated the adjustment as 
zero. Accordingly, the IRS needs to be able to determine that the 
partnership's calculation is accurate.
    The comment also requested that a cross-reference to Sec.  
301.6225-1(b)(4) be added to the regulations under section 6227 to 
clarify that the provision may be used in AARs. Section 301.6227-
2(a)(1) provides that the calculation of an imputed underpayment as 
part of the filing of an AAR is done in accordance with Sec.  301.6225-
1, which would include Sec.  301.6225-1(b)(4). Therefore, additional 
clarification is not needed and adding a cross-reference to one portion 
of the entire regulation that is cited may cause confusion regarding 
whether the other provisions in Sec.  301.6225-1 are applicable.
    One comment recommended that if the partnership did not include any 
adjustments to non-income items in calculating an imputed underpayment 
as part of an AAR, the rule should provide that the partnership will 
not be subject to penalty. Nothing in the centralized partnership audit 
regime prohibits a partnership from raising a defense (such as 
reasonable cause) to an asserted penalty if that penalty is subject to 
such a defense. However, if partnerships would never be subject to a 
penalty for failing to include adjustments to non-income items in the 
calculation of the imputed underpayment, this would discourage 
partnerships from including non-income items in the calculation as 
there would not be a penalty for the IRS to utilize to enforce correct 
reporting of partnership-related items. The penalty incentivizes proper 
reporting and removing the penalty's application here would negatively 
affect tax compliance. Therefore, this comment is not adopted.
    In addition, one comment also recommended that any adjustment to a 
non-income item that affects the basis of partnership assets should be 
included under the rules of proposed Sec.  301.6225-4 and not under the 
provisions of computing the imputed underpayment on adjustments to 
partnership-related items. This comment is not adopted. Section 
301.6225-1 provides rules for the calculation of the imputed 
underpayment. Adjustments to a partnership's reporting of its non-
income items on its return are included within the calculation of the 
imputed underpayment as are all adjustments to partnership-related 
items. Accordingly, Sec.  301.6225-1, and not proposed Sec.  301.6225-
4, is the proper location for rules governing the calculation of the 
imputed underpayment.
    Finally, one comment recommended removing Sec.  301.6225-
1(d)(2)(iii)(B), which provides that an adjustment that cannot be 
allocated under section 704(b) is treated as a positive adjustment or a 
credit, as appropriate, if the adjustment could result in an increase 
in an item of income, gain, loss, deduction, or credit. The comment 
stated that this rule also addresses the same issue as Sec.  301.6225-
1(b)(4), which provides that an adjustment may be treated as zero for 
purposes of calculating the imputed underpayment if that adjustment is 
included within another adjustment and it would not be appropriate to 
include both adjustments in the calculation. The comment stated that 
both address adjustments to non-income items that are taken into 
account in calculating the imputed underpayment and, therefore, Sec.  
301.6225-1(d)(2)(iii)(B) is duplicative. Although the comment noted 
that it is duplicative, the comment recommended that this provision be 
amended to provide that items that cannot be allocated under section 
704(b) are not taken into account in computing the imputed 
underpayment.
    As previously mentioned, comments requesting that non-income items 
be excluded completely (or always treated as zero) from the calculation 
of the imputed underpayment are not adopted. Section 301.6225-
1(d)(2)(iii)(B) does not serve the same purpose as Sec.  301.6225-
1(b)(4). Section 301.6225-1(d)(2)(iii)(B) provides that adjustments to 
items that are not allocated under section 704(b) are treated as 
positive adjustments or credits, whichever is appropriate. Section 
301.6225-1(b)(4) provides that adjustments may be treated as zero 
solely for purposes of calculating the imputed underpayment if that 
adjustment is related to, or results from, another adjustment. Section 
301.6225-1(b)(4) does not apply to adjustments that are not related to, 
or result from, another adjustment and, after amendment, it applies to 
all positive adjustments, not just those that are not allocated under 
section 704(b). Therefore, Sec.  301.6225-1(d)(2)(iii)(B) and Sec.  
301.6225-1(b)(4) are not duplicative. Even though those provisions are 
not duplicative, the Treasury Department and the IRS agree that Sec.  
301.6225-1(d)(2)(iii)(B) is duplicative of concepts in other 
provisions, such as the definition of positive adjustment. Accordingly, 
the comment recommending removing Sec.  301.6225-1(d)(2)(iii)(B) is 
adopted. Because Sec.  301.6225-1(d)(2)(iii)(B) is removed in these 
regulations, former Sec.  301.6225-1(d)(2)(iii)(A) is renumbered to be 
Sec.  301.6225-1(d)(2)(iii). No changes were made to the content of the 
paragraph.

3. Cease To Exist

    One comment was received on the proposed changes to Sec.  301.6241-
3. That section provides rules implementing section 6241(7), which 
authorizes the Secretary of the Treasury or her delegate (Secretary) to 
prescribe rules for situations where a partnership (or partnership-
partner) has ceased to exist prior to a partnership adjustment taking 
effect.
A. Guidance Under Section 6232(f)
    The comment recommended not finalizing any of the proposed changes 
to Sec.  301.6241-3 until the IRS issues guidance under section 
6232(f), which provides rules for the IRS to assess amounts due to 
failure to pay imputed underpayments. The comment reasoned that 
guidance under section 6232(f) will provide insight into how the 
provisions under Sec.  301.6241-3 should be coordinated with section 
6232(f). As an alternative, the comment recommended not finalizing the 
proposed changes to Sec.  301.6241-3(c), which provides when 
partnership adjustments take effect. The comment is not clear as to why 
the proposed changes to when partnership adjustments take effect causes 
concern. The comment noted that if the proposed changes were finalized, 
partnerships would be subject to the discretion of the IRS not only as 
to whether the partnership has ceased to exist but also when the 
adjustments take effect.
    As stated in the preamble to the November 2020 NPRM, some of the 
proposed changes to Sec.  301.6241-3 are needed so that the rules 
implementing section 6241(7) do not prevent the IRS from using its 
assessment power under section 6232(f). Unlike some other provisions in 
the centralized partnership audit regime that require regulations or 
other guidance to be effective, section 6232(f) is self-executing and 
does not require the IRS to issue guidance before the provision may be 
used. Section 6241(7) provides that if a partnership ceases to exist 
prior to the partnership adjustments taking effect, then the former 
partners are to take into account the adjustments under regulations 
prescribed by the Secretary.
    Accordingly, as written, section 6241(7) requires its application 
if its conditions are met. Prior to proposed amendment, Sec.  301.6241-
3 provided that adjustments did not take effect until the partnership 
fully paid all amounts due under the centralized partnership audit 
regime but no later than the expiration of the collections period of 
limitations.

[[Page 75480]]

Therefore, if the IRS determined that a partnership ceased to exist, 
section 6241(7) would be the only provision that could be used, 
precluding the use of section 6232(f). There is no reason why the IRS 
should be prevented from using the self-executing rules of section 
6232(f) prior to the issuance of guidance under section 6232(f). 
Therefore, this comment is not adopted.
B. When Adjustments Take Effect
    As previously mentioned, the comment recommended that the proposed 
changes to when partnership adjustments take effect not be finalized. 
The proposed change is needed to allow the IRS to utilize section 
6232(f) and not be foreclosed from doing so by section 6241(7) in 
situations where the partnership has ceased to exist.
    The comment seemed to express concern that the revised definition 
would give the IRS greater discretion over which provision would apply 
and that, as a result, the changes should not be finalized. As stated 
earlier, the November 2020 NPRM proposed to change when partnership 
adjustments take effect from when the partnership has fully paid any 
amounts due under the centralized partnership audit regime to when the 
IRS and the partnership enter into a settlement agreement, when an AAR 
is filed, or if the adjustments become finally determined under Sec.  
301.6226-2(b)(1), which is when a court decision becomes final or when 
the notice of final partnership adjustment (FPA) is mailed if no 
petition is filed under section 6234.
    This change does not provide the IRS with more discretion as the 
IRS has limited control over when the adjustments take effect. Although 
the comment seems to presume that a partnership has complete control 
over when it pays all of the amounts due, if the IRS is utilizing 
collection tools such as a levy, the balance due could become fully 
paid outside of the partnership's control. Likewise, although the IRS 
has some control over when it mails an FPA (influenced in part by 
whether a partnership agrees to an extension of the period of 
limitations under section 6235), the IRS has no control over whether 
the partnership files a petition in response to the FPA, when a court 
decision becomes final, when the partnership files an AAR, or if the 
partnership enters into a settlement with the IRS. Therefore, because 
Sec.  301.6241-3 of the final regulations should not create a situation 
where it precludes the IRS from utilizing section 6232(f) by providing 
that adjustments do not take effect until the amount due from those 
adjustments is paid, the comment is not adopted.
C. Currently Not Collectible
    Under proposed Sec.  301.6241-3(b), a partnership ceases to exist 
if the IRS determines that the partnership terminates under section 
708(b)(1) or the partnership does not have the ability to pay, in full, 
any amount that may be due under the centralized partnership audit 
regime. It further provides that if a partnership's account is 
``currently not collectible'' according to IRS records, then it is 
deemed to not have the ability to pay in full. Previously a partnership 
was considered to have ceased to exist if the IRS determined that the 
partnership terminated under section 708(b)(1) or the partnership does 
not have the ability to pay in full under the centralized partnership 
audit regime. If a partnership is ``currently not collectible,'' it 
does not have the ability to pay in full, which is why the amendment to 
Sec.  301.6241-3(b) was proposed.
    The comment recommended that a definition of ``currently not 
collectible,'' which is used as part of the definition of when a 
partnership may cease to exist, be added to Sec.  301.6241-7 so that 
partnerships will have clear notice of when the IRS would make a 
determination that the partnership has ceased to exist under this 
provision. The comment noted that ``currently not collectible'' is a 
term of art used by the IRS and that the Internal Revenue Manual (IRM) 
sets forth procedures to determine if a taxpayer is ``currently not 
collectible.''
    As an initial matter, the Treasury Department and the IRS note 
that, under Sec.  301.6241-3(b), a partnership may not have the ability 
to pay in full but not be ``currently not collectible.'' As provided in 
Sec.  301.6241-3(b), if the IRS has determined a partnership is 
``currently not collectible'' then it will be deemed not to have the 
ability to pay in full. The comment is correct that the term 
``currently not collectible'' is a term of art used by the IRS. The 
proposed change to the definition of cease to exist under Sec.  
301.6241-3(b)(1) to use the term ``currently not collectible'' is 
intended to be the same as ``currently not collectible'' already in use 
by the IRS in other contexts. The centralized partnership audit regime 
concerns the making of adjustments to partnership-related items and is, 
therefore, not the proper place for new rules regarding collectability 
generally. As the comment correctly noted, there is an entire section 
in the IRM that provides standards and procedures for determining 
whether a taxpayer is ``currently not collectible.'' These procedures 
have been in place for several years and provide a familiar and well-
known standard for both the IRS and taxpayers. Having multiple 
standards or definitions for whether a taxpayer is ``currently not 
collectible'' would result in uncertainty for the IRS and taxpayers. 
Therefore, this comment is not adopted.
D. Coordination With Elections Under Section 6226, Requests for 
Modification, and Payment of the Imputed Underpayment
    As previously stated, section 6241(7) provides that if a 
partnership ceases to exist prior to when any adjustments take effect, 
the former partners of the partnership must take into account the 
adjustments under regulations prescribed by the Secretary. One comment 
expressed concern that it was unclear whether a partnership that has 
ceased to exist may make an election to push out the adjustments under 
section 6226, request modification of the imputed underpayment under 
section 6225(c), or pay the imputed underpayment instead of the former 
partners taking the adjustments into account using the rules in Sec.  
301.6241-3. The comment expressed concern that the IRS could determine 
a partnership ceased to exist prior to the partnership having an 
opportunity to utilize any of these provisions and that may prevent the 
partnership from utilizing any provisions. The comment recommended that 
the rule be clarified to provide that a partnership may make an 
election to push out the adjustments under section 6226, request 
modification of the imputed underpayment under section 6225(c), or pay 
the imputed underpayment even if the partnership has ceased to exist. 
This comment is adopted for the following reasons.
    The rules implementing section 6241(7) were never intended to 
prevent a partnership from making an election to push out the 
adjustments under section 6226, requesting modification of the imputed 
underpayment under section 6225(c), or paying the imputed underpayment. 
Section 6241(7) is a tool the IRS may use in situations where it is 
unclear whether the partnership will be able to pay any amounts due 
resulting from the partnership adjustments to protect the ability to 
collect tax due as a result of the partnership adjustments. Therefore, 
it is not intended to prevent a partnership from reducing or fully 
paying its liability or shifting the liability to its former partners 
as it could if it had not ceased to exist. In addition, one of the two 
criteria for determining whether a

[[Page 75481]]

partnership has ceased to exist is that the partnership does not have 
the ability to fully pay any amounts due under the centralized 
partnership audit regime. If the partnership has the ability to fully 
pay all amounts due, the partnership would not have ceased to exist 
under that criteria.
    In response to the comment, a sentence is added to the end of Sec.  
301.6241-3(a)(1), which provides that a determination that a 
partnership has ceased to exist does not prohibit the partnership from 
requesting to modify the imputed underpayment under section 6225(c). 
The ability to request modification of the imputed underpayment is not 
dependent on whether the partnership is paying the imputed underpayment 
or will elect to push out the adjustments to its partners and, 
therefore, is not dependent on whether the former partners must take 
into account the adjustments.
    In addition, in response to the comment, a sentence is added to the 
end of Sec.  301.6241-3(b)(3), which provides for limitations on the 
IRS's ability to determine that a partnership has ceased to exist. The 
new sentence provides that a determination that a partnership has 
ceased to exist is not effective if the partnership has made a valid 
election under section 6226 to push out the adjustments or has fully 
paid all amounts due under the centralized partnership audit regime 
within ten days of notice and demand for payment. This addition 
protects the IRS's ability to utilize the rules under section 6241(7) 
while still clarifying that a partnership may make an election under 
section 6226 or pay the imputed underpayment and any applicable 
penalties and interest.
E. Former Partners
    Under proposed Sec.  301.6241-3(d), the former partners of a 
partnership are the partners from the last taxable year for which the 
partnership filed a return under section 6031, the partners from any 
AAR filed by the partnership, or the partners from a final 
determination that is binding on the partnership. Prior to the proposed 
changes, the former partners of the partnership were the partners 
during the adjustment year or, if there are no adjustment year 
partners, the partners of the partnership during the last taxable year 
for which the partnership filed a return under section 6031.
    The comment recommended that the proposed changes to the definition 
of ``former partners'' under Sec.  301.6241-3(d) should not be made as 
the proposed change to the definition was related to the change to the 
determination of when the adjustments take effect, which the comment 
previously recommended not be made. Although, as stated in section 3.B 
of this preamble, the comment to retain the existing definition of when 
partnership adjustments take effect is not adopted, the Treasury 
Department and the IRS have decided not to finalize the proposed 
changes to Sec.  301.6241-3(d).
4. Comments on the Special Enforcement Provisions
    Three comments were received on several of the provisions proposed 
under Sec.  301.6241-7 that implement section 6241(11) regarding the 
treatment of special enforcement matters. A comment was made regarding 
whether these rules were consistent with the purpose of the centralized 
partnership audit regime's clear directive that adjustments to 
partnership-related items be adjusted at the partnership level, not in 
a partner examination, and that any departure from that directive 
should be narrow and only exist where there is clear justification for 
the departure. Two comments suggested that the centralized partnership 
audit regime, including section 6235, does not suggest that the period 
of limitations at the partner level impacts the ability of the IRS to 
make adjustments to partnership-related items and that no extensions of 
the period of limitations should be made outside of those expressly 
provided by Congress in section 6235.
    Under section 6241(11), Congress prescribed that in the case of 
partnership-related items that involve special enforcement matters, the 
Secretary may prescribe regulations providing that the centralized 
partnership audit regime does not apply to those partnership-related 
items and that those items are subject to special rules for assessment 
and collection as the Secretary determines to be necessary for the 
effective and efficient enforcement of the Code. Integral to the 
concept that the Secretary can determine that the centralized 
partnership audit regime (or portions of it) does not apply to certain 
partnership-related items is the ability to adjust those partnership-
related items outside of the centralized partnership audit regime.
    Additionally, inherent in the ability to subject items to special 
rules for assessment and collection is the ability to prescribe rules 
for assessment that differ from existing rules, including section 6235. 
If the centralized partnership audit regime does not apply to an item 
then that item may only be adjusted using the rules that apply to 
partnerships that have made an election out of the centralized 
partnership audit regime and not using any of the rules contained in 
subchapter C of chapter 63. For example, if the centralized partnership 
audit regime does not apply to an item, the item could be adjusted on 
the return of the partner and the section 6235 period of limitations 
would not apply to that item. Instead, as for partnerships that have 
elected out of the centralized partnership audit regime, the operative 
period of limitations is the partners' period of limitations on making 
assessments. Because section 6241(11) provides that the IRS may provide 
that the centralized partnership audit regime does not apply to certain 
items and that there are special rules for assessment and collection, 
the IRS may prescribe special rules that impact or rely upon the 
partners' periods of limitations on assessment.
    Therefore, although the centralized partnership audit regime 
provides that adjustments are made at the partnership level based on 
the partnership's period of limitations, Congress, by enacting section 
6241(11), contemplated that there would be times when the centralized 
partnership audit rules did not apply. Accordingly, any special 
enforcement provision that adjusts partnership-related items outside of 
the centralized partnership audit regime or provides special rules 
governing the period of limitations on assessment when items are 
adjusted outside of the centralized partnership audit regime is not 
inconsistent with Congress's intent. Rather, it is consistent with the 
intent of Congress as expressly provided in section 6241(11).
A. Partnership-Related Items That Underlie Adjustments to Items That 
Are Not Partnership-Related Items
    Three comments were received on the proposed special enforcement 
rule under Sec.  301.6241-7(b) that would allow the IRS to make 
determinations regarding partnership-related items as part of an 
adjustment to an item that is not a partnership-related item in 
situations where the treatment of the partnership-related item on the 
partnership return is based, in whole or in part, on information 
provided by the person under examination. The rule in proposed Sec.  
301.6241-7(b) was previewed in Notice 2019-06, which was made available 
to the public on December 20, 2018. Although Notice 2019-06 requested 
comments, no comments were received on this rule.
    All comments recommended that proposed Sec.  301.6241-7(b) be 
removed in its entirety. Two comments expressed concern that 
adjustments made in a

[[Page 75482]]

partner examination could affect the other partners in the partnership 
and the partnership itself. One comment stated that the proposed rule 
appears to be inconsistent with Congress's intent that adjustments to 
partnership-related items be determined at the partnership level. Two 
comments stated that the proposed rule could be interpreted broadly to 
encompass partners involved in the preparation of the return.
    One comment stated that other provisions in the centralized 
partnership audit regime already address the same issue as proposed 
Sec.  301.6241-7(b). That comment stated that the ability for partners 
to file an amended return during the modification process, the ability 
for the partnership to elect to push out the adjustments, and the 
ability to create a specific imputed underpayment for a single or small 
group of partners makes proposed Sec.  301.6241-7(b) redundant and 
unnecessary and, therefore, should be withdrawn. The comment stated 
that these provisions already allow the IRS to make a partnership 
adjustment that involves a single or limited number of partners. The 
comment also stated that proposed Sec.  301.6241-7(b) is inconsistent 
with the foundational principles of the centralized partnership audit 
regime that provides the default rule that the partnership is liable 
for any tax resulting from a partnership adjustment.
    Under proposed Sec.  301.6241-7(b), the IRS may make determinations 
regarding partnership-related items as part of an adjustment to an item 
that is not a partnership-related item. Pursuant to this rule, the IRS 
is making an adjustment to an item that is not a partnership-related 
item. As part of making an adjustment to that item that is not a 
partnership-related item, the IRS may make determinations about a 
component of that item that is not a partnership-related item when that 
component happens to be a partnership-related item. But the item 
actually being adjusted on the partner's return is an item that is not 
a partnership-related item. For example, this situation may arise when 
a partner contributes an asset to the partnership in exchange for an 
interest in the partnership and the partner then sells its interest in 
the partnership. If the IRS disagrees with the amount of the partner's 
contribution to the partnership, the adjustment the IRS actually makes 
is to the partner's outside basis in its partnership interest and the 
gain the partner reported on the sale of its partnership interest that 
is reported on the partner's return. The IRS is not adjusting the 
contribution to the partnership or the partnership's basis in the 
contributed asset so, therefore, nothing on the partnership's return or 
anything maintained in its books and records changes as a result of the 
adjustment made to the partner's return.
    Because the IRS is adjusting an item that is not a partnership-
related item during an examination of the partner, rules regarding the 
creation of a specific imputed underpayment, a partner's filing of an 
amended return during modification, or the partnership making an 
election under section 6226 do not address the special enforcement 
matter underlying proposed Sec.  301.6241-7(b). To utilize these 
provisions, the IRS would have to remove the item that is not a 
partnership-related item that is affected by partnership-related items 
from the partner examination it currently has open. Then, the IRS would 
have to open a separate examination of the partnership just to make an 
adjustment to a partnership-related item (or portion thereof) the 
reporting of which is based in whole or in part on information provided 
by a specific partner or small group of partners who were already under 
examination by the IRS. This is the exact inefficiency proposed Sec.  
301.6241-7(b) was designed to alleviate.
    As previously stated, section 6241(11) by its express terms 
provides that rules may be created where the centralized partnership 
audit regime (or portions of it) would not apply to partnership-related 
items. Therefore, while there are foundational principles in the 
centralized partnership audit regime, such as the default rule that a 
partnership pays tax on partnership adjustments, section 6241(11) 
expressly allows those foundational principles to be inapplicable for 
special enforcement matters.
    Although all comments recommended that the provision be removed in 
its entirety, one recommended that if it is retained, the rule should 
be limited to adjustments that would not impact the other partners at 
all and another recommended that the applicability date of the rule not 
be the date that Notice 2019-06 was issued and that the accompanying 
example be modified.
    Under proposed Sec.  301.6241-7(h)(2), determinations about 
partnership-related items that are made outside of the centralized 
partnership audit regime are not binding on any person who was not a 
party to the proceeding. Accordingly, if none of the other partners or 
the partnership become parties to the proceeding, no determination from 
that proceeding is binding on them or would otherwise affect them. This 
is similar in result to an examination of a partner in a partnership 
that elected out of the centralized partnership audit regime. Although 
the IRS may not make corresponding adjustments to the partnership's 
items or to items of other partners not parties to the proceeding 
without opening another proceeding, nothing prevents the partnership or 
the other partners from taking any action to adjust those items.
    To provide clarity in response to the comment, Sec.  301.6241-
7(h)(2) has been modified to clarify that the partnership and the other 
partners are not bound to any determination regarding a partnership-
related item resulting from the partner-level examination and nothing 
in Sec.  301.6241-7 requires the partnership or other partners to 
adjust their returns. Section 301.6241-7(h)(2) has also been modified 
to provide further explanation of how determinations regarding 
partnership-related items outside of the centralized partnership audit 
regime affect others who are not parties to the proceeding. Section 
301.6241-7(h)(2) has been modified to provide an example illustrating 
that if the partnership or any other partner does not become a party to 
a partner level proceeding conducted due to the application of any of 
the special enforcement rules (not just under Sec.  301.6241-7(b)) the 
partnership and the other partners are not bound to any determinations 
made in the partner-level proceeding. The example in Sec.  301.6241-
7(b)(2) has been updated accordingly and has also been modified to 
provide clarity as to the items being adjusted in the example as a 
result of comments made at the public hearing.
    The Treasury Department and the IRS also note that Sec.  301.6241-
7(b) is very similar to Sec.  301.6222-1(c)(4), which provides rules 
for conducting a partner-level proceeding if the partner notifies the 
IRS of the partner's inconsistent treatment of partnership-related 
items. Like Sec.  301.6241-7(b), Sec.  301.6221-1(c)(4)(ii) provides 
rules for adjusting or determining partnership-related items in a 
partner-level proceeding and provides that the IRS may adjust the 
partnership-related item to be the correct treatment, even if that 
treatment is different than the partnership's treatment of the 
partnership-related item. As with Sec.  301.6241-7(b), Sec.  301.6222-
1(c)(4)(ii) provides that any final decision in that partner-level 
proceeding is not binding on the partnership if the partnership was not 
a party to the proceeding. The rule under Sec.  301.6241-7(b) is not 
unique in the centralized partnership audit regime.
    Accordingly, the comments have been adopted to the extent they 
expressed

[[Page 75483]]

concern about the effect on the partnership and the other partners as a 
result of determining partnership-related items as part of an 
adjustment to an item that is not a partnership-related item at the 
partner level. Nothing in these rules precludes the other partners or 
the partnership from taking any action they deem necessary, including 
requiring a partner to notify the partnership or the other partners of 
any examination involving any of the special enforcement provisions.
    As mentioned previously, the comments expressed concern that the 
rule allowing the IRS to adjust partnership-related items outside of 
the centralized partnership audit regime as part of an adjustment to an 
item that is not a partnership-related item could be interpreted very 
broadly and could apply to a wide variety of partnership-related items 
and even to partners involved in the preparation of the partnership 
return. It is unclear from the comments how the rule could be 
interpreted broadly to apply to a wide variety of partnership-related 
items and a wide variety of persons.
    For this rule to apply, all of the following conditions must be 
met: (1) a person other than the partnership must be under examination; 
(2) the IRS must propose an adjustment to an item that is not a 
partnership-related item; (3) a partnership-related item must be a 
component of that item that is not a partnership-related item; (4) 
determinations about that partnership-related item must be needed in 
order to adjust the item that is not a partnership-related item; and 
(5) the treatment on the partnership's return of the partnership-
related item that is the component of the item that is not a 
partnership-related item being adjusted must be based, in whole or in 
part, on information provided by the person under examination. The 
information provided by the person under examination is that person's 
information, not the partnership's information (that is, it is not 
something maintained in the partnership's books and records). A partner 
who prepares the partnership return would only be covered by this 
provision if that partner were under examination based on the partner's 
own tax return filings that required such adjustments, not based on the 
fact that the partner prepared the return. A partner that provides all 
of the information needed to prepare the partnership's return that is 
the partnership's information (for example, its transactions) would not 
be covered by the rule as the treatment on the partnership's return is 
not based on information provided by the partner but is based on the 
partnership's information. To avoid any confusion, in response to this 
comment, Sec.  301.6241-7(b)(1)(iii) is modified to clarify that the 
information provided by the partner that forms the basis of the 
reporting by the partnership must come from the partner's own books and 
records, not the books and records of the partnership.
    Another comment recommended that if the rule is retained that the 
provision be clarified. Specifically, the comment recommended that the 
rule be clarified to provide: (1) when a determination regarding a 
partnership-related item is ``part of'' or ``underlying'' an adjustment 
to an item that is not a partnership-related item; (2) whether the 
person described in proposed Sec.  301.6241-7(b)(1)(i) is the same 
person as in proposed Sec.  301.6241-7(b)(1)(ii) and (iii); (3) whether 
the determination regarding a partnership-related item occurs before or 
after the IRS determines that the centralized partnership audit regime 
does not apply to that partnership-related item; (4) a definition of 
``non-partnership-related item''; and (5) in the example, whether some 
of the facts are determinative of the outcome.
    Regarding the comments about clarifying the meaning of ``part of'' 
and ``underlying,'' these terms do not have a special meaning for 
purposes of the centralized partnership audit regime and should be read 
using the ordinary meaning of those words. As these words do not have a 
special meaning for purposes of the centralized partnership audit 
regime, this comment is not adopted. With regard to defining ``non-
partnership-related item,'' the comment is adopted by removing the term 
``non-partnership-related item.'' Instead, the final rules refer to 
``items that are not partnership-related items'' when referring to 
items that do not meet the definition of a partnership-related item.
    Proposed Sec.  301.6241-7(b)(1)(i) provides that there must be an 
examination of a person who is not the partnership. Proposed Sec.  
301.6241-7(b)(1)(ii) and (iii) refer to ``the'' person whose return is 
under examination and not ``a'' person who is under examination. No 
other persons, other than the partnership, are referred to in proposed 
Sec.  301.6241-7(b)(1). As there is only one person who is under 
examination mentioned in proposed Sec.  301.6241-7(b)(1), it is the 
same person in subparagraphs (i), (ii), and (iii) of proposed Sec.  
301.6241-7(b)(1). As there is only one person under examination that is 
mentioned, the provision has been clarified to prevent any confusion by 
clarifying that the person described in Sec.  301.6241-7(b)(1)(ii) and 
(iii) is the same person referred to in Sec.  301.6241-7(b)(1)(i). 
Accordingly, the comment to clarify whether the person referred to in 
proposed Sec.  301.6241-7(b)(1)(ii) is the same as the person referred 
to in proposed Sec.  301.6241-7(b)(1)(iii), is adopted.
    It is unclear what the concern is regarding the comment requesting 
clarity about whether the determination regarding a partnership-related 
item is made by the IRS before or after the IRS chooses to make other 
determinations regarding that partnership-related item outside of the 
centralized partnership audit regime. Before the IRS makes a 
determination that a partnership-related item may be adjusted or 
determined outside of the centralized partnership audit regime under 
Sec.  301.6241-7, the general rule of section 6221 applies and 
adjustments to partnership-related items must be made under the 
centralized partnership audit regime. Therefore, a partnership-related 
item cannot be adjusted or determined outside the centralized 
partnership audit regime until after the IRS makes a determination 
under Sec.  301.6241-7.
    A decision to apply Sec.  301.6241-7 is in itself the determination 
regarding whether adjustments to a partnership-related item may be made 
outside of the centralized partnership audit regime. The decision under 
Sec.  301.6241-7 does not itself make a determination regarding a 
partnership-related item. If the IRS decides that a determination 
should be made outside of the centralized partnership audit regime in 
accordance with Sec.  301.6241-7, the IRS then makes the determination 
as part of the partner's examination. Because additional clarification 
is unnecessary the comment is not adopted.
    With regard to whether some of the facts in the example are 
determinative of the outcome, the facts that the comment mentions (no 
liability or activity) are there to prevent confusion over whether the 
partner's outside basis would have changed after the partner made the 
initial contribution to the partnership in exchange for an interest in 
the partnership. Accordingly, the facts are determinative not of the 
rule being illustrated in the example but of the amounts used in the 
example. Without those facts it could be unclear why the partner's 
basis on June 9, 2019, is the same as it was on June 1, 2018.
    The comment also asserts that ``the adjustment to the non-
partnership-related item results in the adjustment to the partnership-
related item.'' It is unclear what the comment is referring to. The 
adjustment being made in the example is to an item that is not a 
partnership-related item, which

[[Page 75484]]

therefore does not result in an adjustment to a partnership-related 
item at the partnership level. The adjustment is being made at the 
partner level during an examination of the partner and it is not 
binding on the partnership in the same way that an adjustment to the 
return of a partner in a partnership that was not subject to the 
centralized partnership audit procedures would not be binding on that 
partnership. However, the IRS is not precluded from commencing a 
partnership examination to effect a consistent adjustment. As explained 
previously in the preamble, no adjustment to a partnership-related item 
on the partnership's return or in the partnership's books and records 
is made when the IRS makes a determination regarding a partnership-
related item as part of an adjustment to an item that is not a 
partnership-related item, including in a partner examination. In 
proposed Sec.  301.6241-7(b), only adjustments to items that are not 
partnership-related items are made. Nothing on the partnership's return 
is changed when an adjustment in a partner examination to an item that 
is not a partnership-related item is made under proposed Sec.  
301.6241-7(b) even if the IRS adjusts the item that is not a 
partnership-related item as if items on the partnership's return were 
incorrect. Proposed Sec.  301.6241-7(b) applies only to situations 
where the IRS is adjusting in a partner examination an item that is not 
a partnership-related item and needs to determine a partnership-related 
item to effectuate the overall adjustment to the item that is not a 
partnership-related item. No other example in the regulations 
implementing the centralized partnership audit regime states whether 
each fact is determinative of the outcome, and it would cause more 
confusion to note determinative facts only in this one example. 
Therefore, the comment is not adopted. However, the term ``adjusted'' 
in proposed Sec.  301.6241-7(b) has been removed to alleviate any 
confusion.
    Finally, as mentioned previously, one comment recommended that the 
effective date of Sec.  301.6241-7(b) should be the same as the other 
special enforcement matters in the November 2020 NPRM and not be 
applicable to tax years beginning after December 20, 2018, the date the 
rule was previewed in Notice 2019-06. The comment noted that the period 
of limitations on making adjustments to partnerships subject to the 
centralized partnership audit regime has not yet expired for taxable 
years beginning after December 20, 2018, and, therefore, 
``retroactivity'' is unnecessary. As mentioned earlier, this rule was 
previewed in Notice 2019-06 and no comments were received. Notice 2019-
06 stated that the Treasury Department and the IRS intended that the 
rule, when proposed, would be applied with respect to taxable years 
ending after December 20, 2018. Section 301.6241-7(b) is substantially 
similar to the rule contained in Notice 2019-06. Therefore, this 
recommendation is not adopted. In addition, whether the period of 
limitations on making adjustments to partnerships subject to the 
centralized partnership audit regime has not yet expired for taxable 
years beginning after December 20, 2018, is not relevant to the 
application of this rule. Under Sec.  301.6241-7(b), the IRS may 
determine that the centralized partnership audit regime does not apply 
to any determinations regarding partnership-related items in situations 
described in Sec.  301.6241-7(b). Accordingly, as the IRS would be 
determining that the centralized partnership audit regime does not 
apply, it would be the partner's period of limitations on assessment 
that would apply and not the partnership's period of limitations on 
making adjustments.
B. Special Relationships and Extensions of the Partner's Period of 
Limitations
    Three comments were received on proposed Sec.  301.6241-7(f). 
Proposed Sec.  301.6241-7(f) permits the IRS to determine that the 
centralized partnership audit regime does not apply to adjustments to 
partnership-related items in situations where the period of limitations 
on making adjustments at the partnership level has expired but a 
partner's period of limitations on assessment has not expired and that 
partner has a relationship with the partnership that is described in 
section 267(b) or 707(b). The proposed rule also applies if the partner 
has expressly agreed, in writing, to extend the time to adjust and 
assess any tax attributable to partnership-related items for the 
taxable year.
    The comments recommended removing proposed Sec.  301.6241-7(f) in 
its entirety. One of the comments expressed concern about adjusting one 
partner without considering how those adjustments would affect the 
other partners in the partnership and noted that the rule unreasonably 
overlaps with proposed Sec.  301.6241-7(b) as it would also apply to 
managers and general partners who provide information to a partnership. 
However, as noted in section 4.A of the preamble (discussing 
partnership-related items that are components of adjustments to items 
that are not partnership-related items), under Sec.  301.6241-7(h)(2), 
an adjustment to a partnership-related item that occurs in a partner-
level proceeding is not binding on the partnership or the other 
partners in the partnership unless they are also parties to the 
proceeding and Sec.  301.6241-7(b) does not apply to situations 
involving the partnership's own records. Accordingly, any adjustments 
made under proposed Sec.  301.6241-7(f) would not bind the partnership 
or the other partners.
    That comment also expressed concern that proposed Sec.  301.6241-
7(f) does not define control as it does not state under what conditions 
a partner could be considered to have control because sections 267(b) 
and 707(b) do not use concepts of control through voting or management 
rights. The comment concludes that control must be better defined to be 
administrable for the IRS and predictable to taxpayers. Finally, the 
comment noted that the concept of control is only referenced in 
proposed Sec.  301.6241-7(f)(1). Therefore, the comment concludes, 
proposed Sec.  301.6241-7(f) could be used to adjust any partnership-
related item of any direct or indirect partner that has an open period 
of limitations or who agrees to extend their period of limitations.
    Proposed Sec.  301.6241-7(f) provides that the IRS may adjust 
partnership-related items outside of the centralized partnership audit 
regime (that is, during a partner examination) if the period of 
limitations on making partnership adjustments has expired for the 
taxable year and one of two tests is met--(1) the partner meets the 
requirements under section 707(b) or is related to the partnership 
under section 267(b); or (2) the partner expressly agrees to extend the 
time to adjust and assess tax attributable to partnership-related 
items. While the comment stated that the applicability of the rule is 
unclear because sections 267(b) and 707(b) do not use concepts of 
control through voting or management rights, the comment does not 
explain why voting or management rights should be the applicable test. 
However, because of the confusion expressed by this comment, the non-
operative text of the heading of Sec.  301.6241-7(f)(1) has been 
changed from ``controlled partnerships'' to ``special relationships'' 
to clarify that the provision is not about actual control of the 
partnership but instead is solely focused on whether the partner is 
related to the partnership under the generally applicable rules of 
section 267(b) or 707(b). Under proposed Sec.  301.6241-7(f)(1), a 
partner is covered by the rule if the partner bears a relationship to 
the partnership described under section 267(b) or 707(b) without regard 
to whether the partner

[[Page 75485]]

has control based on voting or management rights. This provision has 
been slightly reworded for clarity in the final regulations, but the 
rule has not changed. In addition, it is unclear how Sec.  301.6241-
7(f)(1) could be used to adjust any partnership-related item for any 
direct or indirect partner. As stated previously, for the rule to apply 
the partner must either be related to the partnership under section 
267(b) or 707(b) or have expressly agreed to extend the time to adjust 
and assess tax attributable to partnership-related items. Accordingly, 
if a partner is not related to the partnership as described in section 
267(b) or 707(b), the only way Sec.  301.6241-7(f) will apply to the 
partner is if the partner expressly agrees in writing to the extension.
    Two comments state that proposed Sec.  301.6241-7(f) appears to be 
inconsistent with Congress's clear directive in the centralized 
partnership audit regime to adjust partnership-related items and to 
determine the period of limitations for partnership adjustments 
exclusively at the partnership level and that the IRS should not extend 
the period of limitations beyond what Congress has prescribed in 
section 6235. However, as discussed more fully in the introduction to 
section 4 of this preamble, Congress expressly provided that the 
Secretary could prescribe rules under which the centralized partnership 
audit regime (or any portion of it) would not apply to partnership-
related items. If the centralized partnership audit regime does not 
apply to a partnership-related item, then the item or amount is not 
adjusted or determined at the partnership level and the period of 
limitations on making adjustments at the partnership level does not 
apply to that adjustment or determination. Accordingly, Congress 
expressly provided a means to make adjustments to or determinations 
regarding partnership-related items and determine periods of 
limitations at the partner level, and, therefore, Sec.  301.6241-7(f) 
is consistent with congressional intent.
    Two comments also expressly stated that the rationale for proposed 
Sec.  301.6241-7(f) contained in the preamble to the November 2020 NPRM 
is not that strong and does not warrant determining or extending the 
period of limitations by regulation as the rule applies to all 
partners, not merely those in tiered structures and is inconsistent 
with congressional intent. As stated previously, the special 
enforcement rules contained in Sec.  301.6241-7 are consistent with 
congressional intent as they implement the express rules provided by 
Congress in section 6241(11) of the Code. While it is correct that 
Sec.  301.6241-7(f) may apply outside of tiered structures and that the 
situation contemplated in the preamble to the November 2020 NPRM is 
more likely to apply in tiered structures as they may be more complex, 
the special enforcement considerations provided in the preamble to the 
November 2020 NPRM may also apply in non-tiered structures. In 
addition, Sec.  301.6241-7(f) does not extend the period of 
limitations. Section 301.6241-7(f) only applies if the partner's period 
of limitations has not expired and nothing in Sec.  301.6241-7(f) 
extends the partner's period of limitations. Although the period of 
limitations on making adjustments at the partnership level under 
section 6235 will have expired, as noted previously, if the centralized 
partnership audit regime does not apply to an item or amount, then the 
partner's period of limitations on making assessments applies to that 
item or amount and not the period of limitations on making adjustments 
under section 6235. Accordingly, Sec.  301.6241-7(f), if applicable, 
merely changes what period of limitations applies but does not extend 
any period of limitations.
    For these reasons, the recommendation to remove Sec.  301.6241-7(f) 
in its entirety is not adopted.
C. Chapter 1 Taxes and Penalties
    Two comments were received on proposed Sec.  301.6241-7(g), which 
allows the IRS to adjust partnership-related items that are taxes, 
penalties, additions to tax, or additional amounts (including making 
any determinations necessary to make those adjustments) imposed on the 
partnership under chapter 1 outside of the centralized partnership 
audit regime. One comment recommended that Sec.  301.6241-7(g) be 
withdrawn because the rule is not necessary within the construct of the 
centralized partnership audit regime as the commenter does not believe 
a partnership-partner would owe an imputed underpayment as a result of 
the audited partnership electing to push out the adjustments. The 
comment noted that there should not be a second proceeding to make 
adjustments at the partner level. This comment seems to misunderstand 
the application of proposed Sec.  301.6241-7(g). The comment seems to 
be based on language in the preamble of the November 2020 NPRM that was 
discussing proposed changes to Sec.  301.6225-1 and not proposed Sec.  
301.6241-7(g). As proposed Sec.  301.6241-7(g) does not apply in any of 
the situations the comment expresses concern about, the comment is not 
adopted. A comment noted that items under chapter 1 are imposed on 
partners, not partnerships, and that Sec.  301.6241-6 already addresses 
taxes outside of chapter 1. That comment recommended that proposed 
Sec.  301.6241-7(g) be amended to clarify its scope and purpose, and 
both comments requested that examples be added. This recommendation has 
been adopted.
    Under chapter 1 of the Code, a partnership may, in certain 
circumstances, be directly liable for taxes, penalties, additions to 
tax, or additional amounts. In these circumstances, the amount is 
assessed and collected from the partnership and not its partners. For 
example, a real estate mortgage investment conduit may have a liability 
under Sec. Sec.  860F or 860G. As another example, a partnership that 
has self-certified as a qualified opportunity fund under Sec.  1400Z-
2(d)(1) may have a liability under Sec.  1400Z-2. Although chapter 1 
liability for partnerships is rare, it does exist and more 
circumstances could be added by Congress in the future. These amounts 
are the ones covered by Sec.  301.6241-7(g). Section 301.6241-7(g) does 
not apply to any taxes outside of chapter 1, and it does not apply to 
any taxes, penalties, additions to tax, or additional amounts which, 
under the Code, would be assessed and collected from the partners of 
the partnership. Because Sec.  301.6241-7(g) does not apply to taxes 
outside of chapter 1, it does not apply to any adjustments to an 
imputed underpayment as an imputed underpayment is a tax imposed by 
subchapter C of chapter 63 and not chapter 1. Although under section 
6232(a) an imputed underpayment is assessed and collected as if it were 
a tax imposed by subtitle A (which includes chapter 1), an imputed 
underpayment is determined under the provisions of subchapter C of 
chapter 63, and the partnership's liability for any imputed 
underpayment is created under subchapter C of chapter 63. This includes 
any imputed underpayment of the audited partnership as well as any 
imputed underpayment a pass-through partner is liable for under section 
6226(b)(4)(A)(ii)(II) when the pass-through partner fails to furnish 
statements to its partners when the pass-through partner receives a 
push out statement from another pass-through entity. Proposed Sec.  
301.6241-7(g) does not create a second partner-level proceeding to make 
adjustments as proposed Sec.  301.6241-7(g) only applies to any chapter 
1 taxes and penalties that are the liability of the audited

[[Page 75486]]

partnership and, therefore, does not apply to any partners.
    Also, an example is added to Sec.  301.6225-1(h)(15) to illustrate 
how adjustments to partnership-related items that are taxes, penalties, 
additions to tax, or additional amounts under chapter 1 are made under 
these regulations.
    Another comment recommended creating a new grouping for adjustments 
to chapter 1 taxes and penalties that are the liability of the 
partnership and adjustments to an imputed underpayment calculated by 
the partnership. The comment noted that the new grouping would act just 
like the credit grouping, however, the comment recommended not using 
the existing credit grouping as this may cause confusion because these 
items are not credits. Although the Treasury Department and the IRS 
agree that chapter 1 liabilities of the partnership and the imputed 
underpayment are not credits, adding an additional grouping would 
create an administrative burden on the IRS as it would require amending 
all forms, instructions, worksheets, computer programs, and internal 
processes that involve groupings. The administrative burden that would 
be imposed on the IRS far outweighs any confusion that may occur in the 
rare situation where the imputed underpayment or chapter 1 taxes or 
penalties are adjusted and placed into the credit grouping. In 
addition, although these items are not technically credits, the items 
easily operate like credits for purposes of the calculation of the 
imputed underpayment, and thus it is logical to include them with the 
credit grouping and treat them similarly. Accordingly, this comment is 
not adopted.
D. Adjustments to Imputed Underpayments
    One comment was received on the provisions for situations where the 
IRS makes an adjustment to an imputed underpayment calculated by the 
partnership (for example, as part of the filing of an AAR). These 
provisions were proposed amendments to Sec.  301.6225-1(c)(3), 
(e)(3)(ii), (f)(1)(ii), (f)(3), and Sec.  301.6226-2(g)(4).
    The comment stated that proposed Sec.  301.6226-2(g)(4) limits the 
partnership's ability to push out an imputed underpayment that arises 
from the adjustment to a previously calculated imputed underpayment and 
stated that nothing in the Code or legislative history implies that 
there is a limitation on the push out election. The comment recommended 
that a partnership that has filed an AAR be permitted to push out any 
adjustments made to the imputed underpayment included on the AAR. As 
previously noted, there is no legislative history of the centralized 
partnership audit regime, but the Treasury Department and the IRS agree 
that section 6226 does not limit the ability of a partnership to elect 
to push out to each partner from the reviewed year that partner's share 
of any adjustment to a partnership-related item.
    Under section 6241(2)(B)(i), the imputed underpayment is included 
within the definition of ``partnership-related item.'' Accordingly, any 
adjustment to an imputed underpayment must be made under the 
centralized partnership audit regime. The comment stated that any 
adjustment to an imputed underpayment should not result in a second 
imputed underpayment. The comment stated that the IRS could merely 
adjust the incorrect imputed underpayment, assess the difference 
against the partnership, and issue notice and demand to the 
partnership. The comment did not provide the source of the authority 
for the IRS to assess a change in an imputed underpayment without 
making an adjustment to the imputed underpayment under the centralized 
partnership audit regime.
    Under section 6221, any adjustment to a partnership-related item, 
including an imputed underpayment, must be determined at the 
partnership level under subchapter C of chapter 63. Under section 
6232(b), the IRS may not assess an imputed underpayment if the IRS does 
not issue an FPA to the partnership it is assessing. As the comment 
correctly noted, there are several instances in which a partnership (or 
other pass-through partner) can be liable for an imputed underpayment 
that is calculated by the partnership--when the partnership files an 
AAR and does not elect to push out the adjustments to its reviewed year 
partners, when a pass-through partner pays an imputed underpayment as 
part of an amended return modification, and where a pass-through 
partner fails to timely issue statements to its partners when it 
receives a statement under section 6226 and is, therefore, liable for 
an imputed underpayment. In all of these circumstances, the partnership 
has chosen to be liable for an imputed underpayment and has not chosen 
to pass the adjustments out to its partners. In all of these 
circumstances, the IRS has not issued an FPA to the partnerships at 
issue. Because these examples are not examples in which the partnership 
is self-reporting the amount of the imputed underpayment and no FPA has 
been issued, section 6232(b) prohibits the IRS from assessing an 
imputed underpayment calculated on an adjustment the IRS makes to a 
partnership-related item (in this case, an imputed underpayment).
    As previously mentioned, in all cases where the IRS is making an 
adjustment to an imputed underpayment previously calculated by a 
partnership, the partnership is liable for the imputed underpayment, 
and the time to forego that liability by pushing out the adjustments to 
its partners has passed. In cases where the adjustment is solely to the 
previously calculated imputed underpayment, Sec.  301.6226-2(g)(4) 
provides that the partnership cannot push out the imputed underpayment 
to its partners from the reviewed year. Although section 6226 does not 
contain a limitation on the ability to elect to push out the 
adjustments, there are key differences here.
    First, the partnership has already chosen to be liable for the 
imputed underpayment that has been adjusted. The imputed underpayment 
is only ever the liability of the partnership and not the partners 
because the deadline to push out the adjustments that resulted in the 
imputed underpayment has passed. Therefore, if the partnership could 
make a push out election of this portion of the imputed underpayment 
that adjustment would be allocable to the partnership. See generally 
Sec.  301.6226-2(f)(1)(ii) and (iii) (unless adjusted, a partner's 
share of the adjustments is the same as it was allocated originally or 
how they would be allocated if the item was included on the partnership 
return). An imputed underpayment is not an item that is allocable to 
partners on a Schedule K-1; rather it is an entity-level liability of 
the partnership. Accordingly, there would be no practical difference 
between pushing out the imputed underpayment adjustment to itself and 
paying the imputed underpayment at the time it pushes out any unrelated 
adjustments to its partners. Practically, in both situations the 
partnership would be liable for the change in the imputed underpayment 
in the adjustment year.
    Second, allowing the partnership to push out an adjustment to an 
imputed underpayment to its partners would frustrate the intent of the 
centralized partnership audit regime by allowing a partnership to 
circumvent sections 6225 and 6226 in situations where these provisions 
have already determined that the partnership is liable for the 
underlying imputed underpayment that is being adjusted. There is 
nothing under sections 6226 or 6227 that allows a partnership to push 
out the

[[Page 75487]]

adjustments that resulted in an imputed underpayment to its reviewed 
year partners after the deadline for making that election or furnishing 
the statements has passed. Once the deadline has passed, the 
partnership is liable for the imputed underpayment.
    Finally, allowing the partnership to push out portions of an 
imputed underpayment to its partners for them to pay might prevent the 
assessment and collection of the imputed underpayment, which would 
frustrate the purpose of the centralized partnership audit regime. 
Under section 6226(b), a partner takes the pushed-out adjustments into 
account by calculating the amount by which the partner's chapter 1 tax 
would have changed in the first affected year and any intervening year. 
This change in chapter 1 tax is referred to in Sec.  301.6226-3 as the 
additional reporting year tax, and it is a tax for the year in which 
the statement was furnished by the audited partnership and not the 
prior years. However, an imputed underpayment is not a tax under 
chapter 1. An imputed underpayment is imposed by subchapter C of 
chapter 63. Therefore, if a partnership was allowed to push out 
portions of the imputed underpayment to be paid by its partners, 
section 6226(b) would arguably exclude that imputed underpayment 
portion from the calculation of the additional reporting year tax. No 
other provision in the Code would allow the IRS to assess an imputed 
underpayment on a partner in situations where the partnership has made 
an election under section 6226, leaving the IRS without a method to 
assess. Therefore, the recommendation to allow a partnership to push 
out an adjustment to an imputed underpayment is not adopted.
E. Indirect Methods of Proof of Income
    One comment was received on proposed Sec.  301.6241-7(e), which 
implements section 6241(11)(B)(iv). Under proposed Sec.  301.6241-7(e) 
the IRS may adjust any partnership-related item as part of a 
determination of a partner's liability if that determination is based 
on an indirect method of proof of income. The comment recommended that 
Sec.  301.6241-7(e) be revised to include a definition of ``indirect 
method of proof of income'' so that taxpayers understand precisely when 
the rule could apply given the extraordinary power of the special 
enforcement rules. The comment also recommended that the definition be 
proposed in a notice of proposed rulemaking so it will be open to 
notice and comment.
    Under TEFRA, section 6231(c) provided that, for special enforcement 
matters, the IRS may, through regulations, treat partnership items that 
interfere with the effective and efficient enforcement of subchapter C 
of chapter 63 as nonpartnership items. One of those special enforcement 
matters is indirect methods of proof of income. Section 6231(c)(1)(C). 
Section 301.6231(c)-6 provides rules for the determination of a 
partner's liability that is based on an indirect method of proof of 
income. Both Sec.  301.6241-7(e) and Sec.  301.6231(c)-6 use the phrase 
``indirect methods of proof of income.'' Additionally, both section 
6241(11)(B)(iv) and section 6231(c)(1)(C) use the phrase ``indirect 
methods of proof of income.'' The term ``indirect methods of proof of 
income'' is not a term of art under either TEFRA or the centralized 
partnership audit regime. The meaning of the term in TEFRA and the 
centralized partnership audit regime is the same as the term is used in 
other areas of tax law. Indirect methods of proof of income are well-
established methods under case law for situations where a taxpayer's 
income is determined using indirect evidence. Having different 
definitions of ``indirect methods of proof of income'' for partnership 
proceedings would result in confusion to both the IRS and taxpayers. 
For the reasons stated, the comment is not adopted.
F. General Comments
    One comment recommended changes to the phrasing of the special 
enforcement provisions. The comment recommended that the regulations 
under Sec.  301.6241-7 be modified to be more like the regulations 
implementing section 6231(c) under TEFRA which, as previously 
mentioned, is also about special enforcement matters. The regulations 
that implement section 6231(c) are Sec. Sec.  301.6231(c)-3 through 
301.6241(c)-8 (TEFRA special enforcement regulations). The comment also 
made recommendations about the terms used in proposed Sec.  301.6241-7.
i. Discretion of the IRS in Utilizing the Special Enforcement Rules
    All of the provisions under proposed Sec.  301.6241-7 provide that 
the IRS may make adjustments or determinations about partnership-
related items outside of the centralized partnership audit regime. The 
IRS has discretion regarding whether to utilize these rules if the 
conditions prescribed for each special enforcement matter are met. 
Under TEFRA, there are five special enforcement matters contained in 
the TEFRA special enforcement regulations--termination and jeopardy 
assessments; criminal investigations; indirect methods of proof of 
income; bankruptcy and receivership; and prompt assessment. For all of 
these special enforcement considerations, if the specified event 
occurs, the TEFRA special enforcement provision automatically applies, 
and the partnership items of the partner to whom the special 
enforcement matter applies become nonpartnership items.
    The comment stated that, under the TEFRA special enforcement 
regulations, the IRS has no discretion not to apply the special 
enforcement rules if the ``triggering event'' occurs. The comment 
contrasts the TEFRA rule with proposed Sec.  301.6241-7, which provides 
the IRS may utilize the special enforcement rules if the triggering 
events occur. The comment recommended that Sec.  301.6241-7(c) 
(termination or jeopardy assessments), (d) (criminal investigations), 
and (e) (indirect methods of proof of income) be modified to provide, 
if the triggering event occurs, that the IRS has no discretion to apply 
the special enforcement rules due to the extraordinary consequences of 
special enforcement.
    The comment is correct that under the TEFRA special enforcement 
regulations if the specified triggering event occurs the special 
enforcement rules automatically apply. However, the automatic 
triggering of the rules does not mean that the IRS lacks discretion 
regarding whether the special enforcement rules apply. Except for the 
rules on bankruptcy and receivership and prompt assessment, each 
special enforcement rule in TEFRA is triggered by an affirmative 
exercise of discretion by the IRS. For example, under Sec.  
301.6231(c)-5, which provides rules for criminal investigations, for 
this provision to apply, the partner must be under criminal 
investigation and the IRS must also send the partner a letter expressly 
telling the partner that his or her partnership items will be treated 
as nonpartnership items. The IRS has discretion whether to send such a 
letter. Similarly, the IRS has discretion regarding whether to take the 
affirmative action that would trigger the application of the TEFRA 
special enforcement regulations such as deciding whether to make a 
termination or jeopardy assessment or issue a statutory notice of 
deficiency based on an indirect method of proof. Sec. Sec.  
301.6231(c)-4; 301.6231(c)-6.
    Under the TEFRA special enforcement regulations, only two rules 
have a triggering event that is not an action of the IRS. Under Sec.  
301.6231(c)-7, generally, the partnership items of a partner are 
treated as nonpartnership

[[Page 75488]]

items if the partner has filed for bankruptcy or is in a receivership 
proceeding. Section 301.6241(c)-7 does not require the IRS to be 
notified or know about the bankruptcy or receivership. In many 
situations the IRS does not learn that a specific partner has been in 
bankruptcy or receivership until well into the TEFRA proceeding at a 
time when the partner's period of limitations on assessment would have 
expired if it was not for the minimum period described in section 6229. 
This has caused substantial administrative problems for the IRS because 
the IRS may be properly obtaining extensions under section 6229(b) but 
those would be inapplicable to a specific partner based on facts not 
known to the IRS.
    In addition, there are fundamental differences between TEFRA and 
the centralized partnership audit regime that affect whether the 
special enforcement rules should automatically apply if the triggering 
event occurs. Under TEFRA, any adjustments made during a TEFRA 
proceeding are ultimately passed to the partners who are liable for any 
taxes on those adjustments. In contrast, in the centralized partnership 
audit regime the proceeding is one of the partnership and not the 
partners, and the examination is determining the liability of the 
partnership and not the partners. Therefore, there may be situations 
where utilizing the special enforcement rules under Sec.  301.6241-7 
are not appropriate, even if the provision would apply because there is 
a liability being determined in a proceeding under the centralized 
partnership audit regime. For example, the IRS may already have the 
partnership under examination or the partnership may have already filed 
a petition in response to an FPA. In those cases, it may be more 
efficient to include those adjustments with the other adjustments being 
made rather than make adjustments in two parallel proceedings, 
especially if the partnership proceeding is close to resolution. 
Therefore, for the reasons discussed previously, the comment is not 
adopted.
    The comment also noted that, unlike TEFRA, Sec.  301.6241-7 does 
not address a situation where a partner and the partnership have 
different taxable years, although the comment noted that one of the 
TEFRA special enforcement provisions also does not address this 
situation. The comment recommended that the proposed rules in Sec.  
301.6241-7 be revised to adopt the language from the TEFRA special 
enforcement regulations to provide that the special enforcement rules 
under Sec.  301.6241-7 apply to partnership-related items arising in 
any partnership taxable year ending on or before the last day of the 
taxable year of the partner.
    Although the TEFRA special enforcement regulations (except one), 
provide specific rules regarding which taxable year or years the 
provision applies to, as the comment correctly noted, the TEFRA special 
enforcement regulations automatically apply if the specified triggering 
event occurs. In addition, the TEFRA special enforcement regulations 
apply to all partnership items of a partner, not specified ones as in 
Sec.  301.6241-7, so it is clear which items are treated as 
nonpartnership items and for which years without any notification from 
the IRS. As discussed previously, the rules under proposed Sec.  
301.6241-7 do not automatically apply if the specific triggering event 
occurs, and the partner will not have to determine whether the rule 
applies and to which items or years. Under Sec.  301.6241-7(h), the IRS 
will notify, in writing, the taxpayer who is being adjusted that the 
rule will apply. As the partner will have specific information directly 
from the IRS as to his or her specific facts and circumstances, the 
comment is not adopted.
ii. Items and Adjustments
    One comment was received regarding the use of the term 
``adjustment'' in proposed Sec.  301.6241-7. Under 6241(11), the 
Treasury Department and the IRS may prescribe regulations for special 
enforcement matters under which the centralized partnership audit 
regime (or any portion thereof) does not apply to such items. Under 
proposed Sec.  301.6241-7, which implements section 6241(11), the IRS 
may adjust partnership-related items outside of the centralized 
partnership audit regime in the specified special enforcement matters.
    The comment recommended that proposed Sec.  301.6241-7 be revised 
to state that a partnership-related item (and any related penalties) 
that the IRS determines is not subject to the centralized partnership 
audit regime is subject to deficiency procedures under subchapter B of 
chapter 63. The comment stated that the use of the term ``adjustments'' 
is inconsistent with the authority under section 6241(11), which 
expressly provides that section 6241(11) applies to partnership-related 
``items.''
    As an initial matter, it is unclear from the comment whether the 
comment has interpreted proposed Sec.  301.6241-7 to apply to an entire 
partnership-related item, or just a partner's portion of a partnership-
related item such that if the IRS utilizes the special enforcement 
rules the entire partnership-related item may not be adjusted under the 
centralized partnership audit regime. If the IRS utilized the special 
enforcement rules, only the portion of the partnership-related item(s) 
to which the special enforcement provision applies may be adjusted or 
determined outside of the centralized partnership audit regime.
    In addition, utilizing the special enforcement rules to adjust 
partnership-related items as part of an adjustment being made at the 
partner level where a special enforcement matter exists does not 
prohibit the IRS from adjusting the entire partnership-related item 
under the centralized partnership audit regime. The partnership is not 
bound by any determinations in a partner-level proceeding to which it 
is not a party. Proposed Sec.  301.6241-7(i) contains rules for 
coordinating adjustments made to partnership-related items at the 
partnership level so that the same partnership-related item is not 
taxed twice. In addition, a partnership may request to modify the 
imputed underpayment based on adjustments previously taken into account 
by a partner.
    The special enforcement rules only apply if there is a special 
enforcement matter. In a partnership not all partners have the same 
facts and circumstances. Therefore, there may be a special enforcement 
matter for one partner but not another. The IRS may not adjust 
partnership-related items outside of the centralized partnership audit 
regime that would be allocable to a partner who does not have a special 
enforcement matter. This rule is similar to the rule under TEFRA. Under 
section 6231(c)(2) partnership items are treated as nonpartnership 
items if a special enforcement matter exists, to the extent provided in 
regulations. Under the TEFRA special enforcement regulations, only the 
partnership items of the specific partner who has the special 
enforcement matter are treated as nonpartnership items. In order to 
alleviate any confusion, in response to this comment, Sec.  301.6241-
7(a) is modified to clarify that only the portion of the partnership-
related item that is subject to the special enforcement rules may be 
adjusted outside of the centralized partnership audit regime and that 
Sec.  301.6241-7 does not prohibit the IRS from adjusting the entire 
partnership-related item under the centralized partnership audit 
regime.
    With regard to the use of the term ``adjustments'' instead of 
``items,'' section 6241(11) applies to partnership-related items. The 
term ``partnership-related item'' is a term of art under the 
centralized partnership audit regime

[[Page 75489]]

and is defined in section 6241(2)(B). As a term of art, ``partnership-
related'' is not separate from ``item.'' Under the centralized 
partnership audit regime, adjustments are made to partnership-related 
items. The rules under Sec.  301.6241-7 apply to partnership-related 
items and provide rules for adjusting those partnership-related items 
in situations where there is a special enforcement matter. Accordingly, 
the special enforcement rules already apply to ``items.'' In addition, 
the Treasury Department and the IRS are unaware of any situation where 
no adjustment is being made to an item and yet the application of the 
centralized partnership audit regime would matter. For the reasons 
stated, this comment is not adopted.
    In addition, if an adjustment is made outside of the centralized 
partnership audit regime, that adjustment would be subject to the rules 
that would apply if the centralized partnership audit regime did not 
exist. Accordingly, deficiency procedures would apply to the adjustment 
if the adjustment would be subject to deficiency procedures for a 
taxpayer not subject to the centralized partnership audit regime. To 
the extent the comment is recommending extending deficiency procedures 
to adjustments that would not normally be subject to deficiency 
procedures, the comment is not adopted. The comment provides no 
rationale for why an adjustment made outside of the centralized 
partnership audit regime using the special enforcement rules should be 
different than an adjustment that is made to an item that is not 
subject to the centralized partnership audit regime.

5. Comments Outside the Scope of the November 2020 NPRM

    One comment included several recommendations that are outside the 
scope of the November 2020 NPRM. Accordingly, no response is provided 
for those recommendations, which include a recommendation to amend 
Sec.  301.6225-1(e)(3)(ii) to provide that net negative adjustments to 
credits can always be used to reduce the imputed underpayment. Although 
the November 2020 NPRM proposed adding a sentence to Sec.  301.6225-
1(e)(3)(ii), the proposed change was limited to adding a sentence about 
net negative adjustments to taxes and penalties for which the 
partnership is liable for under chapter 1; it did not repropose the 
entire paragraph. The recommendation in the comment would require 
modifying the portion of Sec.  301.6225-1(e)(3)(ii) that was not 
proposed to be amended in the November 2020 NPRM. The addition to Sec.  
301.6225-1(e)(3)(ii) in the November 2020 NPRM is unrelated to the 
provision about netting credits contained in other portions of Sec.  
301.6225-1(e)(3)(ii). Therefore, this comment is outside the scope of 
the November 2020 NPRM.
    The comment also included some recommendations on modifications to 
forms and instructions. The November 2020 NPRM does not propose any 
rules regarding forms and instructions. Accordingly, this comment is 
outside of the scope of the November 2020 NPRM.

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.
    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.) it is hereby certified that this final rule will not have a 
significant economic impact on a substantial number of small entities.
    The final rules directly affect any partnership subject to the 
centralized partnership audit regime under subchapter C of chapter 63. 
As all partnerships are subject to the centralized partnership audit 
regime unless they make a valid election out of the regime, the final 
rules are expected to affect a substantial number of small entities. 
However, the IRS has determined that the economic impact on small 
entities affected by the final rule would not be significant.
    The final rules under Sec.  301.6241-7 implement section 6241(11) 
and allow the IRS, for partnership-related items that involve special 
enforcement matters, to provide that the centralized partnership audit 
regime (or a portion thereof) does not apply to such partnership-
related items and that such items are subject to special rules as is 
necessary for the efficient and effective enforcement of the Code. As 
such, the rules provide for certain situations where partnership-
related items may be adjusted outside of the centralized partnership 
audit regime. In all but one of these situations (involving chapter 1 
taxes and penalties that are the liability of the partnership), if the 
rules in Sec.  301.6241-7 were utilized, then the adjustments would be 
made to partners of the partnership, rather than the partnership itself 
and, thus, utilizing the final rules would not have an impact on small 
entities. Additionally, many small entities may be eligible to elect 
out of the centralized partnership audit regime under section 6221(b). 
Accordingly, if a small entity is eligible to elect out, they may 
choose to elect out of the regime at which point the rules contained in 
Sec.  301.6241-7 would be inapplicable to those entities.
    Finally, the final rules under Sec.  301.6241-7 address the process 
for conducting an examination and do not have a significant economic 
impact on small entities as the rules do not affect entities' 
substantive tax, such as the requirement to include items in income or 
the deductibility of items. The final rules promulgated under other 
Code sections simply clarify sections of regulations previously 
published.
    The Secretary hereby certifies that the final rule will not have a 
significant economic impact on a substantial number of small entities.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for the Office of Advocacy of the Small Business Administration 
for comment on its impact on small business, and no comments were 
received.

Statement of Availability of IRS Documents

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

Drafting Information

    The principal author of these regulations is Jennifer M. Black of 
the Associate Chief Counsel (Procedure and Administration). However, 
other personnel from the Treasury Department and the IRS participated 
in the development of the regulations.

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 in numerical order for Sec. Sec.  301.6221(b)-1 and 301.6241-7 
to read in part as follows:


[[Page 75490]]


    Authority: 26 U.S.C. 7805.
* * * * *
    Section 301.6221(b)-1 also issued under sections 6221 and 6241.
* * * * *
    Section 301.6241-7 also issued under section 6241.
* * * * *

0
Par. 2. Section 301.6221(b)-1 is amended by revising paragraphs 
(b)(3)(ii)(D) and (F), adding paragraph (b)(3)(ii)(G), and adding a 
sentence to the end of paragraph (f) to read as follows:


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

* * * * *
    (b) * * *
    (3) * * *
    (ii) * * *
    (D) A wholly owned entity disregarded as separate from its owner 
for Federal income tax purposes,
* * * * *
    (F) Any person who holds an interest in the partnership on behalf 
of another person, or
    (G) A qualified subchapter S subsidiary, as defined in section 
1361(b)(3)(B).
* * * * *
    (f) * * * Notwithstanding the preceding sentence, paragraphs 
(b)(3)(ii)(D), (F), and (G) of this section apply to taxable years 
ending on or after November 20, 2020.


Sec.  301.6223-1  [Amended]

0
Par. 3. Section 301.6223-1 is amended in paragraph (e)(8) by
0
a. Removing the language ``B'' and ``B's'' and adding ``PR'' and 
``PR's'' in their place, respectively, in Example 1; and
0
b. Removing ``B's'' and adding ``PR's'' in its place in Example 2.

0
Par. 4. Section 301.6225-1 is amended:
0
a. By revising the paragraph (b)(3) subject heading;
0
b. By adding two sentences to the end of paragraph (b)(4);
0
c. By adding a sentence to the end of paragraph (c)(3);
0
d. By revising paragraphs (d)(2)(ii) and (iii);
0
e. By removing reserved paragraph (d)(3)(iii)(C);
0
f. By adding a sentence to the end of paragraph (e)(3)(ii);
0
g. By revising paragraph (f)(1)(ii);
0
h. By adding paragraph (f)(3);
0
i. By adding paragraphs (h)(13), (14), and (15); and
0
j. By adding a sentence to the end of paragraph (i)(1).
    The revisions and additions read as follows:


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

* * * * *
    (b) * * *
    (3) Adjustments to items for which tax has been collected under 
chapters 3 and 4 of the Internal Revenue Code (Code). * * *
    (4) * * * In addition, if a positive adjustment to an item is 
related to, or results from, a positive adjustment to another item, one 
of the positive adjustments will generally be treated as zero solely 
for purposes of calculating any imputed underpayment unless the IRS 
determines that an adjustment should not be treated as zero in the 
calculation of the imputed underpayment. This paragraph applies to the 
calculation of any imputed underpayment, including imputed 
underpayments calculated by a partnership or pass-through partner (for 
example, as part of the filing of an administrative adjustment request 
(AAR) under section 6227).
    (c) * * *
    (3) * * * Each adjustment to any tax, penalty, addition to tax, or 
additional amount for the taxable year for which the partnership is 
liable under chapter 1 of the Code (chapter 1) and each adjustment to 
an imputed underpayment calculated by the partnership is placed in the 
credit grouping.
* * * * *
    (d) * * *
    (2) * * *
    (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; an increase in an item of credit; a decrease in an item 
of tax, penalty, addition to tax, or additional amount for which the 
partnership is liable under chapter 1; or a decrease to an imputed 
underpayment calculated by the partnership for the taxable year.
    (iii) Positive adjustment. A positive adjustment is any adjustment 
that is not a negative adjustment as defined in paragraph (d)(2)(ii) of 
this section.
* * * * *
    (e) * * *
    (3) * * *
    (ii) * * * A net negative adjustment to a tax, penalty, addition to 
tax, or additional amount for which the partnership is liable under 
chapter 1 or an adjustment to any imputed underpayment calculated by 
the partnership for the taxable year is not an adjustment described in 
paragraph (f) of this section (adjustments that do not result in an 
imputed underpayment).
* * * * *
    (f) * * *
    (1) * * *
    (ii) The calculation under paragraph (b)(1) of this section results 
in an amount that is zero or less than zero, unless paragraph (f)(3) of 
this section applies.
* * * * *
    (3) Exception to treatment as an adjustment that does not result in 
an imputed underpayment--(i) Application of this paragraph (f)(3). If 
the calculation under paragraph (b)(1) of this section results in an 
amount that is zero or less than zero due to the inclusion of a net 
negative adjustment to a tax, penalty, addition to tax, or additional 
amount for which the partnership is liable under chapter 1 or an 
adjustment to any imputed underpayment calculated by the partnership 
for the taxable year, this paragraph (f)(3) applies, and paragraph 
(f)(1) of this section does not apply except as provided in paragraph 
(f)(3)(ii)(C) of this section.
    (ii) Recalculation if paragraph (f)(3) of this section applies--(A) 
In general. If this paragraph (f)(3) applies, the imputed underpayment 
is recalculated under paragraph (b)(1) of this section without regard 
to a net negative adjustment to a tax, penalty, addition to tax, or 
additional amount for which the partnership is liable under chapter 1 
or an adjustment to any imputed underpayment calculated by the 
partnership for the taxable year. The net negative adjustment that was 
excluded from the imputed underpayment recalculation is then treated in 
one of two ways under paragraphs (f)(3)(ii)(B) and (C) of this section 
depending on the results of the recalculation.
    (B) Recalculation is greater than zero. If the result of the 
recalculation under paragraph (f)(3)(ii) of this section is greater 
than zero, the IRS may apply the portion of the net negative 
adjustment(s) that was excluded from the recalculation to reduce the 
imputed underpayment to zero, but not below zero. In this case, the 
imputed underpayment is zero, but the adjustments included in the 
recalculation and the remaining net negative adjustment(s) excluded 
from the recalculation under paragraph (f)(3)(ii)(A) of this section 
are not adjustments that do not result in an imputed underpayment 
subject to treatment as described in paragraph (f)(2) of this section. 
See paragraph (h)(13) of this section (Example 13).

[[Page 75491]]

    (C) Recalculation is zero or less than zero. If the result of the 
recalculation under paragraph (f)(3)(ii) of this section is zero or 
less than zero, the adjustments included in the recalculation are 
treated as adjustments that do not result in an imputed underpayment 
under paragraph (f)(1)(ii) of this section. The net negative 
adjustment(s) that was excluded from the recalculation is not an 
adjustment that does not result in an imputed underpayment subject to 
treatment as described in paragraph (f)(2) of this section. See 
paragraph (h)(14) of this section (Example 14).
* * * * *
    (h) * * *
    (13) Example 13. The IRS initiates an administrative proceeding 
with respect to Partnership's 2019 partnership return and makes 
adjustments as follows: net positive adjustment of $100 ordinary 
income, net negative adjustment of $20 in credits, and a net negative 
adjustment of $25 to a chapter 1 tax liability of the partnership. The 
IRS determines that the net negative adjustment in credits should be 
taken into account in the calculation of the imputed underpayment in 
accordance with paragraph (b)(1)(v) of this section. Pursuant to 
paragraph (b)(1) of this section, the $100 net positive adjustment to 
ordinary income is multiplied by 40 percent (highest tax rate in 
effect), which results in a $40 imputed underpayment. The adjustments 
in the credits grouping are then applied, which include the adjustment 
to credits and the adjustment to the chapter 1 tax liability. Applying 
the credits results in an amount less than zero as described in 
paragraph (f)(3)(i) of this section ($40-$20-$25 = -$5). Pursuant to 
paragraph (f)(3)(ii) of this section, the imputed underpayment is 
recalculated without regard to the adjustment to the chapter 1 tax 
liability, resulting in a recalculation amount greater than zero as 
described in paragraph (f)(3)(ii)(B) of this section ($40-$20 = $20). 
Pursuant to paragraph (f)(3)(ii)(B) of this section, the IRS may apply 
a portion of the adjustment to chapter 1 tax liability to reduce the 
recalculation to zero but not below zero. In this case, the 
recalculation amount would be reduced to zero using $20 of the $25 
adjustment to chapter 1 tax liability. Because the imputed underpayment 
was reduced to zero, pursuant to paragraph (f)(3)(ii)(B) of this 
section, the adjustments that went into the recalculation are not 
adjustments that do not result in an imputed underpayment. These 
adjustments are the $100 adjustment to ordinary income and the $20 
adjustment to credits. The remaining $5 adjustment to the chapter 1 tax 
liability of the partnership is an adjustment that is treated as 
described in paragraph (e)(3)(ii) of this section and is therefore not 
taken into account on the partnership's adjustment year return.
    (14) Example 14. The facts are the same as in paragraph (h)(13) of 
this section (Example 13), but the negative adjustment to credits is 
$50 instead of $20. Applying the credits results in an amount less than 
zero as described in paragraph (f)(3)(i) of this section ($40-$50-$25 = 
-$35). Pursuant to paragraph (f)(3)(ii) of this section, the imputed 
underpayment is recalculated without regard to the adjustment to the 
chapter 1 tax liability, resulting in a recalculation amount less than 
zero as described in paragraph (f)(3)(ii)(C) of this section ($40-$50 = 
-$10). Pursuant to paragraph (f)(3)(ii)(C) of this section, the 
partnership adjustments resulting in the -$10 recalculation amount are 
adjustments that do not result in an imputed underpayment treated in 
accordance with paragraph (f)(1)(ii) of this section, and the $25 
adjustment to chapter 1 tax liability is not treated as such an 
adjustment and is therefore not taken into account on the partnership's 
adjustment year return.
    (15) Example 15. On its timely filed return for the 2022 taxable 
year, Partnership reports that it self-certified as a qualified 
opportunity fund, as defined in section 1400Z-2(d). Partnership also 
reports that it has not satisfied the 90-percent investment standard, 
as defined in Sec.  1.1400Z2(a)-1(b)(4) of this chapter, and reports an 
amount due under section 1400Z-2(f) of $100. The IRS does not utilize 
Sec.  301.6241-7(g) to determine adjustments to these partnership-
related items without regard to subchapter C of chapter 63. In an 
administrative proceeding involving Partnership's 2022 taxable year, 
the IRS, in examining the amount due under section 1400Z-2(f), 
determines that Partnership incorrectly reported its qualified 
opportunity zone property for one month and that there should be one 
$40 adjustment to reduce the assets Partnership reported as qualified 
opportunity zone property. The IRS also determines that the basis of 
one of Partnership's qualified opportunity zone properties should be 
reduced by $30. Under paragraph (d) of this section, the adjustments to 
the basis and character of an asset are not adjustments to an item of 
income. Therefore, the $30 adjustment to the basis of the asset and the 
$40 recharacterization of an asset are treated as positive adjustments. 
As a result of the determinations, the IRS determines that the amount 
due for Partnership failing the section 1400Z-2(d)(1) investment 
standard should be increased. This results in a $4 adjustment to 
Partnership's liability under section 1400Z-2(f) which, under paragraph 
(d)(2) of this section is a positive adjustment because it is an 
increase in an amount Partnership is liable for under chapter 1. The 
total netted partnership adjustment for the 2022 taxable year is $70 
($30 basis adjustment + $40 recharacterization adjustment). Under 
paragraph (c)(3) of this section, the $4 adjustment to Partnership's 
liability under chapter 1 is treated as an adjustment to a credit. 
Assuming the highest rate under section 1 or 11 is 40% this results in 
an imputed underpayment of $32 (($70 x 40%) + $4 section 1400Z-2(f) 
adjustment). The IRS issues a notice of final partnership adjustment to 
Partnership for its 2022 taxable year and Partnership makes a timely 
election under section 6226 with regard to the $32 imputed 
underpayment. Under Sec.  301.6226-2(g)(1), when Partnership furnishes 
statements to its reviewed year partners, Partnership must pay the $4 
section 1400Z-2(f) amount because it is the liability of Partnership 
and may not include that adjustment in the statements.
    (i) * * *
    (1) * * * Notwithstanding the preceding sentence, paragraphs 
(b)(4), (c)(3), (d)(2)(ii), (d)(3)(iii)(C), (e)(3)(ii), (e)(3)(iii)(B), 
(f)(1)(ii), (f)(3), and (h)(13), (14), and (15) of this section apply 
to taxable years ending on or after November 20, 2020.
* * * * *

0
Par. 5. Section 301.6225-2 is amended:
0
a. In paragraph (d)(2)(vi)(A), by removing the period and the end of 
the paragraph and adding in its place ``, by treating any approved 
modifications and partnership adjustments allocable to the pass-through 
partner as items reflected on the statement furnished to the pass-
through partner.'';
0
b. By revising paragraph (d)(2)(vi)(B); and
0
c. By adding a sentence to the end of the paragraph (g)(1).
    The revision and addition read as follows:


Sec.  301.6225-2  Modification of imputed underpayment.

* * * * *
    (d) * * *
    (2) * * *
    (vi) * * *
    (B) Adjustments that do not result in an imputed underpayment. If a 
pass-

[[Page 75492]]

through partner takes into account its share of the adjustments by 
paying an amount described in paragraph (d)(2)(vi)(A) of this section 
and there are any adjustments that do not result in an imputed 
underpayment (as defined in Sec.  301.6225-1(f)), those adjustments 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 payment described in paragraph (d)(2)(vi)(A) of 
this section is paid. This paragraph (d)(2)(vi)(B) does not apply if, 
after making the calculation described in paragraph (d)(2)(vi)(A) of 
this section, no amount exists and therefore no payment is required 
under paragraph (d)(2)(vi)(A).
* * * * *
    (g) * * *
    (1) * * * Notwithstanding the preceding sentence, paragraph 
(d)(2)(vi)(B) of this section applies to taxable years ending on or 
after November 20, 2020.
* * * * *

0
Par. 6. Section 301.6225-3 is amended:
0
a. In paragraph (b)(1) by removing ``a reduction in non-separately 
stated income or as an increase in non-separately stated loss'' and 
adding in its place ``part of non-separately stated income or loss'';
0
b. By adding paragraphs (b)(8) and (d)(3) through (5); and
0
c. By adding a sentence to the end of paragraph (e)(1).
    The additions read as follows:


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

* * * * *
    (b) * * *
    (8) Adjustments to items that are not items of income, gain, loss, 
deduction, or credit. The partnership takes into account an adjustment 
that does not result in an imputed underpayment that resulted from an 
adjustment to an item that is not an item of income, gain, loss, 
deduction, or credit by adjusting the item on its adjustment year 
return but only to the extent the item would appear on the adjustment 
year return without regard to the adjustment. If the item is already 
reflected on the partnership's adjustment year return as an item that 
is not an item of income, gain, loss, deduction, or credit, or in any 
year between the reviewed year and the adjustment year, a partnership 
should not create a new item in the amount of the adjustment on the 
partnership's adjustment year return.
* * * * *
    (d) * * *
    (3) Example 3. On its partnership return for the 2020 taxable year, 
Partnership placed Asset into service, reporting that Asset, a non-
depreciable asset, had a basis of $100. During an administrative 
proceeding with respect to Partnership's 2020 taxable year, the IRS 
determines that Asset has a basis of $90 instead of $100. The IRS also 
determines that Partnership has a negative adjustment to credits of $4. 
There are no other adjustments for Partnership's 2020 taxable year. 
Under Sec.  301.6225-1(d)(2)(iii), the adjustment to the basis of an 
asset is not an adjustment that is a decrease in an item of income, a 
partnership adjustment treated under paragraph Sec.  301.6225-
1(d)(2)(i) as a decrease in an item of income, or an increase in an 
item of credit. Therefore, the $10 adjustment to the basis of Asset is 
treated as a $10 positive adjustment. The IRS determines that the net 
negative adjustment to credits should be taken into account as part of 
the calculation of the imputed underpayment. The total netted 
partnership adjustment is $10, which, after applying the highest rate 
and decreasing the product by the $4 adjustment to credits results in 
an imputed underpayment of $0. Accordingly, both adjustments are 
adjustments that do not result in an imputed underpayment under Sec.  
301.6225-1(f). The adjustment year is 2022 and Partnership still owns 
Asset. Under paragraph (b)(8) of this section, Partnership takes into 
account the $10 adjustment to Asset on its 2022 return by reducing its 
basis in Asset by $10. The reduction in the basis of Asset does not 
require Partnership to recognize income or gain in situations where 
income or gain is not otherwise recognized.
    (4) Example 4. On its partnership return for the 2020 taxable year, 
Partnership reports a recourse liability of $1,000. During an 
administrative proceeding with respect to Partnership's 2020 taxable 
year, the IRS determines that the liability is a nonrecourse liability 
instead of a recourse liability. The IRS also determines that 
Partnership has a negative adjustment to credits of $400. There are no 
other adjustments for Partnership's 2020 taxable year. Under Sec.  
301.6225-1(d), the adjustment to the liability is not an adjustment to 
an item of income. Therefore, the $1,000 change to the liability is 
treated as two $1,000 positive adjustments (a $1,000 decrease to 
nonrecourse liabilities and a $1,000 increase to recourse liabilities). 
The IRS determines that the adjustment to nonrecourse liabilities 
should be treated as zero for purposes of calculating the imputed 
underpayment under Sec.  301.6225-1(b)(4). The IRS also determines that 
the net negative adjustment to credits should be taken into account as 
part of the calculation of the imputed underpayment. The total netted 
partnership adjustment is $1,000, which, after applying the highest 
rate and decreasing the product by the $400 adjustment to credits 
results in an imputed underpayment of $0. Accordingly, both adjustments 
are adjustments that do not result in an imputed underpayment under 
Sec.  301.6225-1(f). Partnership pays off the entire liability in 2021. 
The adjustment year is 2022. Under paragraph (b)(8) of this section, 
the liability no longer appears on the return due to the satisfaction 
of the liability in the 2021 taxable year. Accordingly, no adjustment 
is made to Partnership's 2022 return as a result of the adjustment to 
the liability. If, instead of satisfying the entire $1,000 liability in 
2021, Partnership made a payment of $500 towards the liability, on its 
2022 return, Partnership would change the character of the $500 
liability on its 2022 return to be a nonrecourse liability.
    (5) Example 5. The facts are the same facts as the facts in 
paragraph (d)(3) (Example 3) except that Partnership has two equal 
partners--A and B--both of whom are individuals. After Partnership 
receives a notice of proposed partnership adjustment containing the $4 
negative adjustment to credits and the $10 adjustment to Asset, 
Partnership requests modification under Sec.  301.6225-2(d)(2) and (e) 
based on A filing an amended return. On her amended return, A takes 
into account her share of the adjustments which is a $2 negative 
adjustment to credits and a $5 adjustment to Asset. Based on A's facts 
and circumstances, A does not have any tax impact as a result of the 
adjustment to Asset so her amended return only reflects a tax impact 
from the additional $2 in credits. Because A filed an amended return, 
the imputed underpayment is recalculated without the portion of the 
adjustments allocable to A. In this case, the total netted partnership 
adjustment is $5, which, after applying the highest rate and decreasing 
the product by the $2 adjustment to credits results in an imputed 
underpayment of $0. Accordingly, both adjustments (the $10 adjustment 
to Asset and the $4 adjustment to credits) are adjustments that do not 
result in an imputed underpayment under paragraph (f) of this section. 
The adjustment year is 2022 and Partnership still owns Asset.

[[Page 75493]]

Under paragraph (b)(8) of this section, Partnership takes into account 
the $10 adjustment to Asset on its 2022 return by reducing its basis in 
Asset by $10. The reduction in the basis of Asset does not require 
Partnership to recognize income or gain in situations where income or 
gain is not otherwise recognized.
    (e) * * *
    (1) * * * Notwithstanding the preceding sentence, paragraphs (b)(8) 
and (d)(3) through (d)(5) of this section apply to taxable years ending 
on or after November 20, 2020.
* * * * *

0
Par. 7. Section 301.6226-2 is amended by:
0
a. Revising the paragraph (g)(3) subject heading.
0
b. Adding paragraph (g)(4).
0
c. Adding a sentence to the end of paragraph (h)(1).
    The revision and additions read as follows:


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

* * * * *
    (g) * * *
    (3) Adjustments subject to chapters 3 and 4 of the Code.* * *
    (4) Liability for chapter 1 taxes and penalties. A partnership that 
makes an election under Sec.  301.6226-1 with respect to an imputed 
underpayment must pay any taxes, penalties, additions to tax, 
additional amounts, or the amount of any adjustments to any imputed 
underpayment calculated by the partnership that is determined under 
subchapter C of chapter 63 for which the partnership is liable under 
chapter 1 of the Code or subchapter C of chapter 63 at the time the 
partnership furnishes statements to its partners in accordance with 
paragraph (b) of this section. Any adjustments to such items are not 
included in the statements the partnership furnishes to its partners or 
files with the IRS under this section.
    (h) * * *
    (1) * * * Notwithstanding the prior sentence, paragraph (g)(4) of 
this section applies to taxable years ending on or after November 20, 
2020.
* * * * *

0
Par. 8. Section 301.6241-3 is amended:
0
a. By adding a sentence to the end of paragraph (a)(1);
0
b. By revising paragraph (b)(1)(ii);
0
c. By removing paragraph (b)(2);
0
d. By redesignating paragraphs (b)(3) and (4) as paragraphs (b)(2) and 
(3) respectively;
0
e. By adding a sentence to the end of newly redesignated paragraph 
(b)(3); and
0
f. By revising paragraphs (c), (e)(2)(ii), (f)(1) and (2), and (g).
    The addition and revisions read as follows:


Sec.  301.6241-3  Treatment where a partnership ceases to exist.

    (a) * * *
    (1) * * * A determination under this section that a partnership has 
ceased to exist does not prohibit the partnership from requesting 
modification of the imputed underpayment under section 6225(c).
* * * * *
    (b) * * *
    (1) * * *
    (ii) The partnership does not have the ability to pay, in full, any 
amount that may be due under the provisions of subchapter C of chapter 
63 for which the partnership is or may become liable. For purposes of 
this section, a partnership does not have the ability to pay if the IRS 
determines that the partnership's account is currently not collectible 
based on the information the IRS has at the time of such determination.
* * * * *
    (3) * * * A determination under this section that a partnership has 
ceased to exist is not effective if the partnership has made a valid 
election under Sec.  301.6226-1 in response to a notice of final 
partnership adjustment or has paid all amounts due by the partnership 
under subchapter C of chapter 63 within 10 days of notice and demand 
for payment.
    (c) Partnership adjustment takes effect. For purposes of this 
section, a partnership adjustment under subchapter C of chapter 63 
takes effect when the adjustment becomes finally determined as 
described in Sec.  301.6226-2(b)(1); when the partnership and the IRS 
enter into a settlement agreement regarding the adjustment; or, for 
adjustments appearing on an administrative adjustment request (AAR), 
when the request is filed.
* * * * *
    (e) * * *
    (2) * * *
    (ii) The partnership must furnish statements to the former partners 
and file the statements with the IRS no later than 60 days after the 
later of the date of the notification to the partnership that the IRS 
has determined that the partnership has ceased to exist or the date the 
adjustment takes effect, as described in paragraph (c) of this section.
* * * * *
    (f) * * *
    (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. However, on July 31, 2024, 
Partnership terminates within the meaning of section 708(b)(1). Based 
on the prior termination under section 708(b)(1), the IRS determines 
that Partnership ceased to exist, as defined in paragraph (b) of this 
section, on September 16, 2024. 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. Partnership 
files its final return of partnership income on October 15, 2024, 
listing A and B, both individuals, as the partners for its final 
taxable year ending July 31, 2024. Accordingly, under paragraph (d) 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 
March 21, 2025, the IRS determines that P has ceased to exist because P 
did not make an election under section 6226, P's account is currently 
not collectible, and the IRS does not expect P will be able to pay the 
imputed underpayment. G terminated under section 708(b)(1) on December 
31, 2024. On March 3, 2025, the IRS determines that G ceased to exist 
in 2024 for purposes of this section in accordance with paragraph (b) 
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

[[Page 75494]]

in the statement furnished by P to G in accordance with paragraph (e) 
of this section.
    (g) Applicability date. This section applies to any determinations 
made with respect to taxable years ending on or after November 20, 
2020.

0
Par. 9. Section 301.6241-7 is added to read as follows:


Sec.  301.6241-7  Treatment of special enforcement matters.

    (a) Items that involve special enforcement matters. In accordance 
with section 6241(11)(B) of the Internal Revenue Code (Code), the 
partnership-related items (as defined in Sec.  301.6241-1(a)(6)(ii)) 
described in this section have been determined to involve special 
enforcement matters. If the rules in this section apply, only the 
portion of the partnership-related item to which the special 
enforcement matter applies may be adjusted without regard to subchapter 
C of chapter 63. Nothing in this section prohibits the Internal Revenue 
Service (IRS) from adjusting the entire partnership-related item under 
subchapter C of chapter 63. See paragraph (i) of this section for rules 
coordinating adjustments made under subchapter C of chapter 63 with 
adjustments made without regard to subchapter C of chapter 63.
    (b) Partnership-related items underlying items that are not 
partnership-related items--(1) In general. The IRS may determine that 
the rules of subchapter C of chapter 63 of the Code (subchapter C of 
chapter 63) do not apply to an adjustment to a partnership-related item 
of a partnership if--
    (i) An examination is being conducted of a person other than the 
partnership;
    (ii) A determination regarding a partnership-related item is made, 
as part of, or underlying, an adjustment to an item that is not a 
partnership-related item of the person described in paragraph (b)(1)(i) 
of this section; and
    (iii) The treatment of the partnership-related item on the return 
of the partnership under section 6031(a) or in the partnership's books 
and records is based in whole or in part on information provided by the 
person described in paragraph (b)(1)(i) of this section from that 
person's books and records.
    (2) Example. The following example illustrates the provisions of 
paragraph (b)(1) of this section. For purposes of this example, the 
partnership has no liabilities, is subject to subchapter C of chapter 
63, and the partnership and partner each has a calendar taxable year. 
On June 1, 2018, A acquires an interest in Partnership by contributing 
Asset to Partnership in a section 721 contribution (Contribution). 
Under section 722, A claims a basis in its interest in Partnership of 
$50 equal to A's purported adjusted basis in Asset at the time of the 
Contribution. Partnership claims a basis in Asset of $50 under section 
723 equal to A's purported adjusted basis in Asset as of June 1, 2018, 
based on information A provided to Partnership as part of the 
Contribution. There is no activity in Partnership that gives rise to 
any other partnership-related items between June 1, 2018, and June 2, 
2019. On June 2, 2019, A sells A's interest in Partnership to B for 
$100 in cash and reports a gain of $50 based on A's purported adjusted 
basis in its interest in Partnership of $50. The IRS opens an 
examination of A and determines that A's adjusted basis in its interest 
in Partnership should be $30 instead of the $50 claimed by A because 
A's Contribution to Partnership should have been $30 instead of $50. 
Under paragraph (b) of this section, the IRS may determine that the 
rules of subchapter C of chapter 63 do not apply to the Contribution 
and make a determination about the Contribution (which is a 
partnership-related item under Sec.  301.6241-1(a)(6)(v)(C)) as part of 
an adjustment to A's adjusted basis in its interest in Partnership 
(which is not a partnership-related item). The IRS may make this 
determination because Partnership's reported basis in Asset was based 
on the information provided by A. Because A's adjusted basis in A's 
interest in Partnership is reduced to $30, the total gain from the sale 
of A's interest in Partnership is increased to $70 ($50 as originally 
reported plus $20 as adjusted by the IRS). In accordance with paragraph 
(h)(2) of this section, if A's basis in its interest in Partnership is 
adjusted based on a determination about the Contribution, Partnership 
and the other partners of Partnership are not bound by any 
determination regarding the Contribution resulting from the examination 
of A and no adjustment is required to be made to their returns under 
this section.
    (c) Termination and jeopardy assessment. For any taxable year of a 
partner or indirect partner for which an assessment of income tax under 
section 6851 or section 6861 is made, the IRS may adjust any 
partnership-related item with respect to such partner or indirect 
partner as part of making an assessment of income tax under section 
6851 or section 6861 without regard to subchapter C of chapter 63.
    (d) Criminal investigations. For any taxable year of a partner or 
indirect partner for which the partner or indirect partner is under 
criminal investigation, the IRS may adjust any partnership-related item 
with respect to such partner or indirect partner without regard to 
subchapter C of chapter 63.
    (e) Indirect methods of proof of income. The IRS may adjust any 
partnership-related item as part of a determination of any deficiency 
(or portion thereof) of the partner or indirect partner that is based 
on an indirect method of proof of income without regard to subchapter C 
of chapter 63.
    (f) Special relationships and extensions of the partner's period of 
limitations. If the period of limitations under section 6235 on making 
partnership adjustments has expired for a taxable year, the IRS may 
adjust any partnership-related item that relates to any item or amount 
for which the partner's period of limitations on assessment of tax 
imposed by chapter 1 of the Code (chapter 1) has not expired for the 
taxable year of the partner or indirect partner, without regard to 
subchapter C of chapter 63 if--
    (1) The direct or indirect partner is related to the partnership 
under section 267(b) or 707(b); or
    (2) Under section 6501(c)(4), the direct or indirect partner 
agrees, in writing, to extend the partner's section 6501 period of 
limitations on assessment for the taxable year but only if the 
agreement expressly provides that the partner is extending the time to 
adjust and assess any tax attributable to partnership-related items for 
the taxable year.
    (g) Penalties and taxes imposed on the partnership under chapter 1. 
The IRS may adjust any tax, penalties, additions to tax, or additional 
amounts imposed on, and which are the liability of the partnership 
under chapter 1 without regard to subchapter C of chapter 63. The IRS 
may also make determinations about any partnership-related item, 
without regard to subchapter C of chapter 63, as part of any adjustment 
made to the amount and applicability of the tax, penalty, addition to 
tax, or additional amount imposed on the partnership being determined 
without regard to subchapter C of chapter 63. Any determinations under 
this paragraph (g) will be treated as a determination under a chapter 
of the Code other than chapter 1 for purposes of Sec.  301.6241-6.
    (h) Determination that subchapter C of chapter 63 does not apply--
(1) Notification. If the IRS determines, in accordance with paragraph 
(b), (c), (d), (e), (f), or (g) of this section, that some or all of 
the rules under subchapter C of chapter 63 do not apply to any 
partnership-related item (or portion

[[Page 75495]]

thereof), then the IRS will notify, in writing, the taxpayer to whom 
the adjustments are being made.
    (2) Effect of adjustments not made under subchapter C of chapter 
63. Any final decision with respect to any partnership-related item 
adjusted in a proceeding not under subchapter C of chapter 63 is not 
binding on any person that is not a party to the proceeding. For 
example, if the partnership or any other partner does not become a 
party to a partner-level proceeding conducted as a result of the 
application of this section, the partnership and those other partners 
are not bound to the adjustments determined in the partner-level 
proceeding.
    (i) Coordination with adjustments made at the partnership level. 
This section will not apply to the extent the partner can demonstrate 
adjustments to partnership-related items included in the deficiency or 
an adjustment by the IRS were--
    (1) Previously taken into account under subchapter C of chapter 63 
by the person being examined; or
    (2) Included in an imputed underpayment paid by a partnership (or 
pass-through partner) for any taxable year in which the partner was a 
reviewed year partner or indirect partner but only if the amount 
included in the deficiency or adjustment exceeds the amount reported by 
the partnership to the partner that was either reported by the partner 
or indirect partner or is otherwise included in the deficiency or 
adjustment determined by the IRS.
    (j) Applicability date--(1) In general. Except for paragraph (b) of 
this section, this section applies to partnership taxable years ending 
on or after November 20, 2020. Notwithstanding the preceding sentence, 
upon agreement between the partner under examination and the IRS, any 
provision of this section except for paragraph (b) of this section may 
apply to any taxable year of a partner that relates to a partnership 
taxable year subject to subchapter C of chapter 63 (as amended) that 
ended before November 20, 2020. In addition, a partnership and the IRS 
may agree to apply paragraph (g) to any partnership taxable year ended 
before November 20, 2020, that is subject to subchapter C of chapter 
63, as amended.
    (2) Partnership-related items underlying items that are not 
partnership-related items. Paragraph (b) of this section applies to 
partnership taxable years beginning after December 20, 2018. 
Notwithstanding the preceding sentence, upon agreement between the 
partner under examination and the IRS, paragraph (b) of this section 
may apply to any taxable year of a partner that relates to a 
partnership taxable year subject to subchapter C of chapter 63, as 
amended, that ended on or before December 20, 2018.

Melanie R. Krause,
Acting Deputy Commissioner for Services and Enforcement.
    Approved: November 15, 2022.
Lily Batchelder,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2022-26783 Filed 12-8-22; 8:45 am]
BILLING CODE 4830-01-P