IRS Requests Comments on New Partnership Audit Regime

Part III -- Administrative, Procedural, and Miscellaneous

I. PURPOSE

The purpose of this Notice is to solicit comments regarding implementation of section 1101 of the Bipartisan Budget Act of 2015, Pub. L. No. 114-74 ("the BBA"), which was enacted into law on November 2, 2015. Section 1101 of the BBA repeals the current rules governing partnership audits and replaces them with a new centralized partnership audit regime that, in general, assesses and collects tax at the partnership level.

The repeal of the current partnership audit rules and implementation of the new partnership audit regime are generally effective for partnership taxable years beginning after December 31, 2017. See section 1101(g)(1) of the BBA. However, section 1101(g)(4) generally provides that a partnership may elect (at such time and in such form and manner as the Secretary may prescribe) for parts of the new regime to apply to partnership taxable years beginning after November 2, 2015 and before January 1, 2018.

The Department of the Treasury ("Treasury Department") and the Internal Revenue Service ("IRS") intend to issue guidance implementing the new partnership audit regime. Specifically, guidance describing procedures for making the election to have parts of the new regime apply to taxable years beginning after November 2, 2015 and before January 1, 2018 is expected to be published in the near future. Partnerships that wish to make this election should wait until that guidance is published to ensure the election complies with the requirements for making a valid election. The guidance will be effective for taxable years beginning after November 2, 2015 and before January 1, 2018.

II. BACKGROUND

Section 1101(a) of the BBA removes subchapter C of chapter 63 of the Internal Revenue Code ("the Code") effective for partnership taxable years beginning after December 31, 2017. Subchapter C of chapter 63 contains the unified partnership audit and litigation rules that were enacted as part of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248. These partnership audit and litigation rules are commonly referred to as the TEFRA partnership procedures.

Section 1101(b) of the BBA also removes subchapter D of chapter 63 and part IV of subchapter K of chapter 1 of the Code, rules applicable to electing large partnerships, effective for partnership taxable years beginning after December 31, 2017. Subchapter D contains the audit rules for electing large partnerships, and part IV of subchapter K prescribes the income tax treatment for such partnerships.

Section 1101(c) of the BBA replaces the rules to be removed by sections 1101(a) and (b) with a new partnership audit regime. Section 1101(c) adds a new subchapter C to chapter 63 of the Code, including amended Code sections 6221-6241. The BBA also makes related and conforming amendments to other provisions of the Code.

On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015, Pub. L. 114-113, div. Q ("PATH Act"). Section 411 of the PATH Act corrects and clarifies certain amendments made by the BBA. 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.

Section 6221(a) as amended by the BBA provides that, in general, any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year (and any partner's distributive share thereof) shall be determined, and any tax attributable thereto shall be assessed and collected, at the partnership level. The applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item or share shall also be determined at the partnership level. Section 6221(b) as amended by the BBA provides rules for 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 may elect out of the new regime 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. Section 6221(b)(2)(C) provides that the Secretary by regulation 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.

Section 6222 as amended by the BBA provides rules generally requiring a partner's return to be consistent with the partnership's return.

Section 6223 as amended by the BBA sets forth the rules for designation of a partnership representative. Under this provision, a partnership representative must be a partner (or other person) with a substantial presence in the United States. If a designation is not in effect, the IRS may select any person as a partnership representative.

Section 6225 as amended by the BBA generally addresses partnership adjustments made by the IRS and the calculation of any resulting imputed underpayment. Section 6225(a) generally provides that the amount of any imputed underpayment resulting from an adjustment must be paid by the partnership. Section 6225(b) describes how an imputed underpayment is determined, and section 6225(c) describes modifications that, if approved by the IRS, may reduce the amount of an imputed underpayment. The PATH Act added to section 6225(c) a special rule addressing certain passive losses of publicly traded partnerships. Section 6233 provides rules for computation of interest and penalties on an imputed underpayment.

Section 6226 as amended by the BBA provides an exception to the general rule under section 6225(a)(1) that the partnership must pay the imputed underpayment. Under section 6226, the partnership may elect to have the reviewed year partners take into account the adjustments made by the IRS and pay any tax due as a result of those adjustments. In this case, the partnership is not required to pay the imputed underpayment. Section 6225(d)(1) defines the reviewed year to mean the partnership taxable year to which the item(s) being adjusted relates.

Under section 6227 as amended by the BBA, the partnership may request an administrative adjustment, which is taken into account in the year the administrative adjustment request is made. The partnership generally has three years from the date of filing the return to make an administrative adjustment request for that year, but may not make an administrative adjustment request for a partnership taxable year after the IRS has mailed the partnership a notice of an administrative proceeding with respect to the taxable year.

Section 6241(4) as amended by the BBA provides that no deduction is allowed under subtitle A for any payment required to be made by a partnership under the new partnership audit regime.

Section 6231 as amended by the BBA describes notices of proceedings and adjustments, including certain time frames for mailing the notices and the authority to rescind any notice of adjustment with the partnership's consent. Section 6232(a) provides that any imputed underpayment is assessed and collected in the same manner as if it were a tax imposed for the adjustment year by subtitle A, except that in the case of an administrative adjustment request that reports an underpayment that the partnership elects to pay, the underpayment shall be paid when the request is filed.

Section 6234 as amended by the BBA generally provides that a partnership may seek judicial review of the adjustments within 90 days of the date the notice of final partnership adjustment is mailed. Section 6235 provides the period of limitations on making adjustments. Section 6241 provides definitions and special rules, including rules addressing bankruptcy and treatment when a partnership ceases to exist.

III. REQUEST FOR COMMENTS

.01 The Treasury Department and the IRS intend to issue guidance to implement the new partnership audit regime under sections 6221-6241 of the Code, as amended by section 1101 of the BBA and section 411 of the PATH Act. To assist in the development of this guidance, this Notice requests public comments on issues that the guidance should address. In particular, the Treasury Department and the IRS request comments on the following issues:

IV. ADDRESS TO SEND COMMENTS

.01 Comments responding to this Notice should be sent to:

.02 Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to:

All comments will be available for public inspection and copying.

V. DRAFTING INFORMATION

The principal author of this notice is Joy E. Gerdy Zogby of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this notice contact Joy E. Gerdy Zogby on (202) 317-6834 (not a toll-free call).