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; Reg. § 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 final regs’ guidance on the consistency requirement.
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 Generally effective for tax years beginning after Dec. 31, 2017, Sec. 1101 of the BBA repealed the previous (TEFRA) partnership procedures and the existing rules applicable to electing large partnerships, replacing them with the new regime.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. Certain “eligible partnerships” may also elect out of the post-2017 partnership audit procedures under Code Sec. 6221(b).
In general, under the new regime, any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership tax year (and any partner’s distributive share thereof) is determined, and any tax attributable thereto assessed and collected, at the partnership level. (Code Sec. 6221) The applicability of any penalty which relates to an adjustment to any such item or share is also determined at the partnership level. For additional background regard the centralized partnership audit regime generally, see “Final partnership audit regime regs: scope.”
Under Code Sec. 6222, the so-called “consistency requirement” or “consistency rule,” a partner must, on his or her own return, treat a partnership item in a manner that’s consistent with the treatment of that item on the partnership’s return. The partner’s treatment must be consistent in all respects, including the amount, timing, and characterization of the item.
in June of 2017, IRS issued proposed regs that included rules regarding consistent treatment by partners under Code Sec. 6222. (Preamble to Prop Reg REG-136118-15)
New guidance. The final regs clarify a number of issues relating to the consistency requirement, including:
- The consistency requirement applies to each return of the partner that reflects, or is required to reflect, partnership-related items—including both original and amended returns. The final regs provide that “partner’s return” for this purpose includes any return, statement, schedule, or list, and any amendment or supplement thereto, filed by the partner with respect to any tax imposed by the Code. (Reg. §301.6222-1(a))
- The consistency requirement under Reg. §301.6222-1(c), and the effect of inconsistent treatment under Reg. §301.6222-1(b), do not apply to partnership-related items that are identified as inconsistent (or that are identified as possibly being inconsistent) in a statement attached to the “partner’s return” (as defined above) on which the partnership-related item is treated inconsistently.
- A partner may not notify IRS that the partner is treating an item inconsistently with the partnership return for a tax year after a notice of administrative proceeding (NAP) with respect to such partnership tax year has been mailed by IRS under Code Sec. 6231. (Reg. §301.6222-1(c)(5)) This rule clarifies that once IRS initiates an administrative proceeding with respect to a partnership tax year, any adjustment to a partnership-related item for that year must be determined exclusively within that partnership-level proceeding in accordance with Code Sec. 6221(a).
- A partner may notify IRS that it is taking an inconsistent position with respect to an item reported on an administrative adjustment request (AAR). (Reg. §301.6222-1(c)(2)) Under the proposed regs, the notification procedures didn’t apply with respect to the partner’s treatment of a partnership-related item reflected on an AAR, which had effectively precluded a partner from treating such an item inconsistently. (TD 9844)
- Where a partnership has failed to file a return, any treatment of a partnership-related item on a partner’s return may be removed, and IRS may determine any underpayment of tax resulting from such adjustment. (Reg. § 301.6222-1(b)(1)) Under the proposed regs, a partner’s treatment of a partnership-related item attributable to a non-filing partnership was per se inconsistent.
- Reg. §301.6222-1(c)(4) was revised to make clear that all partners, including those that have filed a notice of inconsistent treatment, are bound by the actions of the partnership and any final decision in a proceeding with respect to the partnership under the centralized partnership audit regime. IRS also emphasized that, while partners generally are not included in a proceeding with respect to the partnership under the centralized partnership audit regime, IRS has the authority to allow any person, including a partner who notified IRS of inconsistent treatment, to participate in that proceeding. (TD 9844)
- The rules of Reg. §301.6222-1 apply to all partners, including partnership-partners that have elected out of the centralized partnership audit regime under Code Sec. 6221(b). (Reg. §301.6222-1(a)(2))
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.