Big Four Asks Treasury to Delay Partnership Reporting Requirements

1. Many partnerships are contractually obligated to issue K-1s as early as February. These partnerships may have difficulty compiling anything more than estimates of this newly requested information for their K-1s.

2. If K-1 information is updated after a partner's tax return has been filed, the partner's tax returns will not match the partnership's tax return unless the partner files an amended or superseding tax return, or an administrative adjustment request, which may be a costly process.

3. Because many partnerships may be unable to provide K-1s that comply with all the New Requirements, and because the IRS will not have approved any specific simplified reporting alternatives, partnerships may adopt their own methods, leaving the IRS to sift through all of the different methods to determine what is reasonable, rather than having clear guidance such as a small number of alternative computational methods or disclosure where reasonable estimates have been used.

1. The New Requirements greatly increase the volume of information that partnerships must provide to the IRS. To the extent that the New Requirements result in additional footnotes to the K-1s, we anticipate that taxpayers and the IRS will encounter difficulties with efficiently filing and receiving such information. Many partners and partnerships are required to e-file electronic returns, but they may have difficulty doing so in some cases because including voluminous footnote information for numerous partners requires appending electronic attachments to those returns which already are quite large without taking into account the New Requirements.

2. The new Centralized Partnership Audit Regime, which generally applies to partnership tax returns for taxable years beginning after December 31, 2017, is still in the guidance and early implementation phase. At least one significant regulatory package remains in proposed form, and neither taxpayers nor the IRS has meaningful experience with examinations under the new rules. The new regime significantly affects the partnership's ability to amend or adjust information presented on a partnership return and the scope of items subject to examination at the partnership (as opposed to the partner) level. The interaction between the new audit rules and the new draft Forms is thus complex, full of uncertainty and may be a source of unanticipated consequences for both taxpayers and the IRS with a multi-year impact tail that potentially results in significant conflict and litigation.

1. A natural consequence of the New Requirements will be the need for training of personnel at IRS call centers to respond to the questions raised in this letter. As described in greater detail below, the vague instructions on many of these New Requirements may cause many partnerships and partners to contact the IRS for assistance on what the draft Forms require.

Tax Capital Account Balances

1. As described in the GAO's report on audits of large partnerships, the IRS received approximately 3.3 million partnership returns in 2011 (increasing to more than 3.7 million by 2016). The New Requirements impact many taxpayers required to file a partnership tax return.

2. Schedule K-1s go out early in the year. Many partnerships are contractually obligated to issue K-1s as early as February. These partnerships may prioritize timely delivery of K-1s to their partners even if tax capital account balances must be estimated to meet this deadline.

3. The New Requirements expand the 2018 request with little notice or guidance to taxpayers. Most partnerships compute partner tax basis information only when specifically required (e.g., on a sale of an interest). Although the IRS requested negative tax capital amounts for 2018, many partnerships could determine (by assessing their balance sheets) that no partner would have a negative tax capital account. Partnerships that could make this determination were not obligated to compute tax capital accounts and could simply leave the question blank.

Section 465 reporting regarding multiple activities

1. Required activity detail reporting creates additional burden. The draft instructions for the 2019 Form 1065 provide for more detailed activity reporting under section 465 than in prior years. Each property held in a partnership is arguably treated as a separate “activity” for purposes of section 465 (unless a statutorily mandated aggregation rule applies). Reporting separate items (and distributions) from each property held in a partnership is extremely burdensome. Aggregating activities within a “trade or business,” would reduce this burden, but would require additional guidance. Because section 465 applies at the partner level, not the partnership level, partnerships have not generally prepared separate accounting for each activity held in the entity but have, rather, maintained at-risk information only where relevant.

Section 704(c) built-in gains or losses

1. Most partnerships can compute section 704(c) net built-in gain or loss using readily available information. However, partnerships will require guidance on the methodology by which section 704(c) gain or loss should be computed.

2. Common examples of section 704(c) technical issues that might create confusion among taxpayers include whether section 704(c) gain or loss includes “reverse” section 704(c) gain or loss, whether section 704(c) items in different “layers” and with respect to different assets should be aggregated, how to account for remedial allocations of section 704(c) gain or loss, and determining a partner's “proportionate” amount of section 704(c) gain or loss on the transfer of a partial interest in the partnership.

3. For a more complete of listing of open questions under section 704(c), see Notice 2009-70. In that Notice, the IRS requested comments on the treatment of nineteen section 704(c) issues As of the date of this document, most of those issues remain unresolved.

4. Publicly traded partnerships (PTPs) cannot separately specify section 704(c) gain or loss for their partners. The PTPs' inability to match individual buyers and sellers on exchange-traded units means that the partnership can only know the sum of a partner's section 704(c) gain or loss amount and section 743(b) adjustment.

5. In the draft instructions for the draft 2019 Form 1065, the IRS provided no instruction for this new and complex reporting requirement. Without instructions for this item, partnerships will need to make their own interpretations as to what the IRS intended to include in its request for section 704(c) gain or loss, which may impact the practical value of the information to the government.

Section 704(c) “adjustments”

1. The draft Form 1065 instructions provide that if a partner received any section 704(c) income or deduction items that are included in any line item on the K-1, the partnership must report “the net section 704(c) adjustment” in box 20, code AA.

2. The term “section 704(c) adjustment” is not used in the regulations under section 704(c), and it is unclear how this amount is determined for partnerships using either the traditional method, the traditional method with curative allocations, or the remedial method. It also is unclear whether partnerships would report a single number for each partner or a single number for each line of each partner's K-1, or whether either of these two requirements would be adequate.

3. Guidance is necessary to determine what information the IRS is looking for and the format in which that information should be presented.

Section 743(b) reporting

1. The draft instructions clarify that partnerships must report the recovery of positive and negative adjustments separately. The draft instructions also would require section 743(b) adjustments to be reported separately for each trade or business. In the case of multiple adjustments, the instructions would require the partnership to describe the assets to which the adjustments are allocated. The instructions to Schedule K-1, lines 11 and 13, also provide that partnership must provide a “schedule” showing the “computation” of a partner's net adjustment in line 20.

2. Guidance is necessary to determine what information the IRS is looking for and the format in which that information should be presented.

Section 199A reporting considerations

1. In 2018, partnerships reported section 199A information on Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., using several codes in box 20, including codes Z (section 199A QBI), AA. (W-2 wages), AB (UBIA of qualified property), AC (qualified REIT dividends), AD (qualified PTP income). In 2019, however, all section 199A information will be reported using a single code Z.

2. The draft instructions to Form 1065 contain three statements that a partnership should use to provide section 199A information to its partners or shareholders. Those three statements are: (A) QBI Pass-Through Entity Reporting; (B) QBI Pass-Through Entity Aggregation Election(s); and (C) QBI Pass-Through Entity Reporting — Patrons of Specified Agricultural and Horticultural Cooperatives.

3. Starting in 2019, any individual claiming a deduction under section 199A will be required to complete either Form 8995 or Form 8995-A. The instructions to these forms describe a new category that relevant passthrough entities (RPEs) will need to report separately for each trade or business so that owners can determine the extent to which that item needs to be included in (qualified business income) QBI at the partner or shareholder level based on their individual circumstances (“QBI/Qualified PTP Items Subject to Taxpayer-Specific Determinations”).

4. The instructions explain that certain items from a partnership, S corporation, estate, or trust are not automatically includible in QBI at the owner level. To determine if an item of income, gain, deduction, or loss is includible in QBI, the owner must look to how it is reported on the owner's federal tax return. For example, section 1231 gains and losses may or not be included in QBI at the owner level, depending on whether they are characterized as capital or ordinary. Other examples include charitable deductions, casualty losses, and interest expenses incurred by an RPE with respect to debt-financed distributions.

5. The draft instructions to Form 1065 will dramatically increase the number of items that RPEs are required to report separately for each trade or business.

Ownership of partnership interests by disregarded entities

1. Partnerships are currently required to issue K-1s to the regarded owners of any partners that are disregarded for U.S. federal tax purposes. Many of these disregarded entities might not currently be obligated to have applied for an employer identification number (EIN) under section 6109 if the entity does not have employees.

2. Some partnerships have not historically collected information from partners that are disregarded for U.S. federal tax purposes because that information was not relevant to the preparation of the partnership return. Including this information on 2019 returns will require partnerships to contact their partners to determine whether the partners hold the interests through disregarded entities and to collect information about that entity. This process will likely be time consuming. If the entity does not already have an EIN, it is unclear whether it will be obligated to apply for one.

1. There are several other changes to the draft Forms. We believe that these requests involve information that can be collected or computed without meaningful administrative burden or cost. These include:

1. Delayed implementation may allow tax software vendors and tax preparers to develop technology to efficiently help taxpayers address new information required for inclusion on the draft Forms.

2. Delayed implementation will allow the Treasury Department and the IRS to benefit from a substantive public comment and dialogue process that may ultimately improve the quality of data collected by the IRS.

3. Delayed implementation will allow the Treasury Department and the IRS to develop safe harbors or estimation methods for situations in which precise measurement of tax capital accounts (or other items such as section 704(c) gain or loss) is unlikely to provide useful data.

4. Finally, the requested delay in implementation will provide more certainty as to the proper reporting of the New Requirements, thereby reducing items or amounts that would be subject to the new Centralized Partnership Audit Regime, which generally applies to partnership tax returns for taxable years beginning after December 31, 2017.

1. We request the opportunity for additional discussions with the Treasury Department and the IRS to explore possible safe harbors, alternative computation methods, and partnership exemptions, to advance the IRS's objectives while reducing taxpayer costs and administrative burdens.

2. Because the 2019 filing season will generally begin in January for calendar year partnerships, any guidance issued after December 2019 should not mandatorily apply to 2019 filings (although partnerships should be permitted to rely on that guidance for 2019 filings).