IRS has issued final regs regarding the election out of the centralized partnership audit regime rules. The final regs largely follow proposed regs that were issued in June 2017.
Background. A new centralized partnership audit regime was enacted as part of the Bipartisan Budget Act of 2015 (the BBA, P.L. 114-74, 11/2/2015). The new rules are generally effective for tax years beginning after Dec. 31, 2017. The BBA repealed the previously-existing TEFRA partnership procedures and the previously-existing rules applicable to electing large partnerships,
Under the new regime, in general, 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) will be determined, and any tax attributable thereto will be assessed and collected, at the partnership level. The applicability of any penalty which relates to an adjustment to any such item or share will also be determined at the partnership level. (Code Sec. 6221)
Code Sec. 6221(b) allows partnerships that are required to furnish 100 or fewer Schedules K-1 (Partner’s Share of Income, Deductions, Credits, etc.) to elect out of this new regime. Generally, a partnership is able to elect out only if each of its partners is an individual, corporation (including certain types of foreign entities), or estate. Special rules apply for purposes of determining the number of partners in the case of a partner that is an S corporation. Code Sec. 6221(b)(2)(C) provides that IRS, by reg or other guidance, may prescribe rules for purposes of the 100-or-fewer-Schedule K-1 requirement similar to the rules for S corporations, with respect to any partner that is not an individual, corporation, or estate.
IRS issued proposed regs covering many subjects regarding the centralized partnership audit regime in January 2017, withdrew them shortly thereafter in accordance with the Trump Administration’s “regulatory freeze,” and then reissued them in June 2017. These proposed regs included Prop Reg § 301.6221(b)-1, which provided rules for electing out of the centralized partnership audit regime; see Weekly Alert ¶ 28 06/15/2017.
Election-out regs finalized. IRS has now finalized Reg. § 301.6221(b)-1. The final regs include only minor changes to the proposed regs, including:
…Under both the proposed and final regs, Reg. § 301.6221(b)-1(b) provides that only an eligible partnership may elect out of the centralized partnership audit regime. A partnership would be an eligible partnership if it has 100 or fewer partners during the year and, if at all times during the tax year, all partners were eligible partners. Reg. § 301.6221(b)-1(b)(3)(ii) sets out which partners are not eligible partners. Under the proposed regs, one category of partner that is not an eligible partner was “a nominee or other similar person that holds an interest on behalf of another person.” The final regs change the wording here to be “any person that holds an interest in the partnership on behalf of another person.”
…Under both the proposed and final regs, Reg. § 301.6221(b)-1(c)(2) provides that partnerships making an election out must disclose to IRS information about each person that was a partner at any time during the tax year of the partnership to which the election applies. Where a partner was an S corporation, the proposed reg required that the information be provided with respect to “each shareholder of the S corporation.” The final regs clarify this S corporation shareholder rule by providing that, as part of a valid election, a partnership must disclose the required information about each person who was a shareholder in the S corporation partner at any time during the tax year of the S corporation ending with or within the partnership’s tax year.
…Under both the proposed and final regs, Reg. § 301.6221(b)-1(c)(3) provides that a partnership that makes an election out must notify each of its partners of the election within 30 days of making the election. The final regs clarify that this notification may be made in the form and manner determined by the partnership.
Effective date. The regs are effective for partnership tax years that begin after Dec. 31, 2017. (Reg. § 301.6221(b)-1(f))
References: For the post-2017 partnership audit rules, see FTC 2d/FIN ¶ T-2400 et seq.; United States Tax Reporter ¶ 62,214.12 et seq. T.D. 9829, 12/29/2017; Reg. § 301.6221(b)-1