TD 9844, 12/21/2018; Reg § 301.6221(a)-1; Reg § 301.6222-1; Reg § 301.6225-1; Reg § 301.6225-2; Reg § 301.6225-3; Reg § 301.6226-1; Reg § 301.6226-2; Reg § 301.6226-3; Reg § 301.6227-1; Reg § 301.6227-2; 301.6227-3; Reg § 301.6231-1; Reg § 301.6232-1; Reg § 301.6233(a)-1; Reg § 301.6233(b)-1; Reg § 301.6234-1; Reg § 301.6235-1; Reg § 301.6241-1; Reg § 301.6241-2; Reg § 301.6241-3; Reg § 301.6241-4; Reg § 301.6241-5; Reg § 301.6241-6
IRS has issued final regs under Code Sec. 6221 through Code Sec. 6241 implementing the centralized partnership audit regime. This article discusses the scope of the final regs.
Background. A new centralized partnership audit regime was enacted as part of the Bipartisan Budget Act of 2015 (BBA). The new regime added a new subchapter C to chapter 63 of the Code. Generally effective for tax years beginning after Dec. 31, 2017, Sec. 1101 of the BBA repealed the previous (TEFRA) partnership procedures and the existing rules applicable to electing large partnerships, replacing them with the new regime. However, partnerships were allowed to elect to have most of the new partnership audit regime apply to returns of the partnership filed for partnership tax years beginning after Nov. 2, 2015 (i.e., the BBA’s enactment date) and before Jan. 1, 2018.
The BBA was amended by the Protecting Americans from Tax Hikes Act of 2015 (PATH, P.L. 114-113, div Q). It was further amended by the Tax Technical Corrections Act of 2018, contained in Title II of Division U of the Consolidated Appropriations Act of 2018 (the Consolidated Appropriations Act or TTCA, P.L. 115-141), which made a number of technical corrections to the rules under the centralized partnership audit regime. The amendments under the TTCA are effective as if included in Code Sec. 1101 of the BBA, and therefore, subject to the effective dates in Sec. 1101(g) of the BBA.
The Consolidated Appropriations Act amended Code Sec. 6221(a). Before being amended, Code Sec. 6221(a) had provided that any adjusment to “items of income, gain, deduction, loss or credit of a partnership for a partnership tax year (and any partner’s distributive share thereof)” was to be determined, and any tax attributable was to be assessed and collected, at the partnership level. After the amendment, it provided that any adjustment to a “partnership-related item” will be determined, any tax attributable to such will be assessed and collected, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item will be determined, at the partnership level (except to the extent otherwise provided in the subchapter). A partnership-related item is defined in Code Sec. 6241(2) as “any item or amount with respect to the partnership (without regard to whether or not such item or amount appears on the partnership’s return and including an imputed underpayment and any item or amount relating to any transaction with, basis in, or liability of, the partnership) which is relevant (determined without regard to this subchapter) in determining the tax liability of any person under chapter 1,” and any partner’s distributive share of any such item or amount.
Final regs. The Preamble to the final regs notes that while one way to achieve a sufficiently broad scope to the audit rules was to attempt to define the term “partnership-related item” to include those items that would have been partnership items, affected items, and computational adjustments under the TEFRA rules, the final regs do not adopt this approach.
IRS concluded that because both the imputed underpayment rules and the Code Sec. 6226 rules (dealing with the alternative to payment of imputed underpayment by the partnership) sufficiently address items that would have been partnership items, affected items, and computational adjustments, it was both unnecessary and over-inclusive to define partnership-related item to encompass all of those items. Accordingly, the final regs clarify that the term partnership-related item does not include items or amounts that would have been TEFRA affected items or computational adjustments.
The final regs define “with respect to the partnership” to exclude items or amounts shown, or required to be shown, on a return of a person other than the partnership (or in that person’s books and records) that result after application of the Code to a partnership-related item and that take into account the facts and circumstances specific to that person. Because these items and amounts are not with respect to the partnership, they are not partnership-related items that IRS must adjust at the partnership level. Examples in Reg § 301.6241-1(a)(6)(vi) illustrate this rule.
The final regs clarify that items or amounts relating to transactions of the partnership are items or amounts with respect to the partnership only if those items or amounts are shown, or are required to be shown, on the partnership return or are required to be maintained in the partnership’s books and records.
Reg § 301.6241-1(a)(6) provides that items reflected, or required to be reflected on the return of a person other than the partnership or in that person’s books and records that result after application of the Code to a partnership-related item are not with respect to a partnership and, thus, not partnership related items.
The final regs provide that any legal or factual determinations underlying any adjustment or determination made under the centralized partnership audit regime are also determined at the partnership level under the centralized partnership audit regime. For instance, such determinations include the period of limitations on making adjustments under the centralized partnership audit regime and any determinations necessary to calculate the imputed underpayment or any modification of the imputed underpayment under Code Sec. 6225
IRS has concluded that the phrase “legal and factual determinations underlying an adjustment or determination” instead of the phrase “any consideration necessary to make a determination at the partnership level” more clearly and accurately reflects the rule that facts and legal conclusions that underlie adjustments to partnership-related items, tax, and penalties made at the partnership level are also determined at the partnership level.
The final regs remove the language “without regard to whether or not such item or amount appears on the partnership’s return” from Prop Reg section 7301.6241-6(b). That phrase derived from the parenthetical that follows “item or amount with respect to the partnership.”
IRS has determined that the parenthetical language in Code Sec. 6241(2)(B)(i) (i.e., determined without regard to this subchapter) describes items or amounts that appear on the partnership return, items or amounts that were required to appear on the return but actually did not, and items or amounts that factor into the determination of items or amounts that do appear on the partnership return. IRS has concluded that this parenthetical does not extend the concept of “with respect to the partnership” to items or amounts that are reported by third parties and that are otherwise not defined as partnership-related items in the final regs. (Reg § 301.6241-1(a)(6)(vi)(A), Reg § 301.6241-1(a)(6)(vi)(B))
Under the final regs, Reg § 301.6241-6 includes the categories of items or amounts that were with respect to the partnership. Reg § 301.6241-1(a)(6)(iii) (as in the proposed regs) provides that items or amounts shown or reflected, or required to be shown or reflected, on the return of the partnership are items or amounts with respect to the partnership.
The final regs also clarify that items or amounts in the partnership’s book or records are items or amounts with respect to the partnership if those items or amounts are “required to be maintained” in the partnership’s books and records. The phrase “required to be maintained” is added to account for items that may be maintained in the partnership’s books and records on a voluntary basis. For example, a partnership may choose to maintain the outside basis of each of its partners in its books and records, even though the Code does not require this information be maintained by the partnership. The rule make clears that the voluntary recording of an item in the partnership’s books is not determinative of the meaning of the phrase “item or amount with respect to the partnership.” A partnership cannot convert an item or amount that is not with respect to the partnership into an item or amount that is with respect to the partnership merely by including that item or amount in the partnership’s books and records.
The final regs provide an item or amount relating to transactions with, liabilities of, and basis in the partnership is with respect to the partnership only if the item or amount is reported, or required to be reported, on the partnership return or is required to be maintained in the partnership’s books and records. Under Code Sec. 6241(2)(B)(ii), a partnership-related item includes a partner’s distributive share of items or amounts that are with respect to the partnership which are relevant in determining the chapter 1 tax of any person. In taking into account the partner’s distributive share of partnership-related items, a partner must apply the provisions of the Code to each partnership-related item to compute the partner’s ultimate tax liability. The application of the Code to the partner’s share of partnership-related items requires taking into account facts and circumstances that are unique to a particular partner. Generally speaking, those facts and circumstances are known only by the partner, are not known by the partnership, and are based on information only within the partner’s control and outside of the partnership’s control.
Effective date. The final regs affect partnerships for tax years beginning after Dec. 31, 2017 and ending after Aug. 12, 2018, as well as partnerships that make the election to apply the centralized partnership audit regime to partnership tax years beginning on or after Nov. 2, 2015, and before Jan. 1, 2018.
References: For the centralized partnership audit rules, see FTC 2d/FIN ¶T-2400 et seq.; United States Tax Reporter ¶62,214.12 et seq.
