Law Firm Recommends Changes to Proposed Regs Providing Automatic Six- Month Extensions

The comments below relate primarily to the proposed six-month automatic extension of time to file returns of pass-through entities (Form 1065 for partnerships). On page 3 of the Background and Explanation of Provisions, the Treasury and the Service expressed concern about the problems of both individual taxpayers and C corporation taxpayers who do not receive Schedule K-1s until the extended due date of October 15, and pointed out that "the automatic six-month extension in this regulation may cause this to happen with more frequency." This is an understatement. Unfortunately, this "filing anomaly" happens frequently now, and surely giving an automatic six-month extension would cause it to happen even more frequently. Thus the burden and expense to taxpayers and the Service alike from having to file and deal with amended returns would be increased by the proposal.

On page 3 of the Notice of Rulemaking, the Treasury and the Service suggest that the availability of a six-month extension of time to file for pass-through entities "may result in taxpayers filing an increased number of amended income tax returns." Although the pass-through entity that found that it needed two extensions to prepare and file its 1065 would be relieved of the burden of requesting the second extension, this burden would appear to be quite small in comparison with the burdens imposed on the pass-through entity's owners, whether individual or corporate, in having to cope with last-minute (or too late) Schedule K-1s. What happens if the last-minute (or late) K-1 includes a reportable transaction subject to the penalty imposed by IRC § 6707A? The corporate owner's extended time for filing would have already expired, and the individual owner's time would be about to expire. Providing a six- month automatic extension of time for pass-through entities would increase, rather than decrease, overall taxpayer burden.

As the Treasury and the Service suggested, "It may be appropriate for pass-through entities to have a shorter extension period than their partners or shareholders". Limiting the pass- through entity's automatic extension period, whether through one or two filings, to not more than five months would reduce the burden for individual owners of pass-through entities, but would do little or nothing for corporate owners. Treasury and the IRS should consider removing the filing anomaly by shortening the extended period for filing provided to pass-through entities, and compare the increased burden on such entities with the decreased burden upon the owners, both individual and corporate, of such entities. Encouraging pass- through entities that request extensions of time to "minimize the impact that such extension might have on their partners' or members' ability to timely file (with an extension)", is meaningless unless accompanied by a mandate.