Proposed regulations released December 15 that permit partnerships to push out adjustments through tiered partnerships under the new partnership audit regime are “very favorable” to taxpayers because they allow push-outs through multiple tiers, practitioners say.
The proposed regs (REG-120232-17, REG-120233-17) permit partnerships to elect under section 6226 to push out adjustments through tiers to the ultimate taxpaying owner. The ability to push out adjustments through tiered structures has been a significant issue for partnerships and practitioners, but the issue was left reserved when proposed regs (REG-136118-15) implementing the new partnership audit regime were released in June. The audit regime was enacted under the Bipartisan Budget Act of 2015 (BBA).
George A. Hani of Miller & Chevalier Chtd. said the rules are helpful, noting prior concerns that partnerships would be unable to push out through multiple tiers. The government could have said there is no push-out beyond the underlying partnership, or it could have adopted an S corporation model under which push-outs would be allowed only through one tier, he said. “I think it’s very favorable that they’re allowing multiple push-outs all the way to the ultimate taxpaying individual or entity,” Hani said. The government was asked to prioritize rules permitting partnerships to push out through tiered partnerships at a hearing on the initial proposed regs in September.
Donald B. Susswein of RSM US LLP welcomed the guidance, saying that failing to implement rules to push out adjustments through tiered partnerships would have disrupted the market. He argued that Congress clearly intended to allow the push-out method under the BBA, even without technical corrections legislation. “They did the right thing, and they did an excellent job at it,” he said of Treasury.
The rules for making tiered push-outs work are technical, and it will take time for the tax community to work through them, said Eric B. Sloan of Gibson, Dunn & Crutcher LLP. “Given what the government has said about their receptivity to taxpayer comments and concerns, I’m optimistic that we will be able to get these regulations, when finalized, to be the best they can be given the deeply troubled statutory provisions,” he said.
Passthrough Push-Outs
Section 6225 requires partnerships to pay an imputed underpayment if any adjustment is made by the IRS to “any item of income, gain, loss, deduction, or credit of a partnership, or any partner’s distributive share.” The authority granted to the IRS by the BBA to collect tax at the entity level is a dramatic shift from the norm for partnership taxation.
Partnerships can elect under section 6226 to push out partnership adjustments instead of paying the imputed underpayment at the entity level, and the review-year partners are required to take the adjustments into account under section 6226(b). The ability to push out an imputed underpayment in a tiered partnership structure has been uncertain since the BBA was enacted.
The proposed regs permit partnerships to push out adjustments through the tiers to the ultimate taxpaying owners by creating a mechanism for each passthrough partner in the ownership chain to either pay the tax associated with an adjustment or push the adjustment to its partners. This framework “provides maximum flexibility for each passthrough partner in the chain to determine the best course for that partner based on its own facts and circumstances,” according to the preamble to the proposed regs.
“I think the rules are complicated, but the optionality is a good thing,” Hani said. The rules give partnerships a “choice of whether they want to endure the complication to get to the right number and right person, or just for administrative ease, pay at the entity level,” he said.
Under prop. reg. section 301.6226-3(e)(1), each passthrough partner that receives a statement under prop. reg. section 301.6226-2 must either make a payment in accordance with prop. reg. section 301.6226-3(e)(4) or push out the adjustments by furnishing statements to its partners and the IRS under prop. reg. section 301.6226-3(e)(3). This process continues through as many tiers as necessary until either a passthrough partner or non-passthrough partner takes the adjustments into account.
The proposed regs require the statements to contain identifying information, including the name and taxpayer identification number of the partnership that made the election to push out the adjustment, the passthrough partner, and the affected partner receiving the statement. IRS officials have indicated that the ability to push out a partnership adjustment through passthrough partners would require a method for the IRS to track the push-out through the tiered structure.
The proposed regs do not require the partnership making the initial push-out election to assemble all the information, Hani noted. “It’s collected as you push out through each tier, so the lower-tier partnership isn’t required to find out who the ultimate owners are, which would have been unrealistic,” he said.
The proposed regs require the statements to be furnished no later than the extended due date for the return for the adjustment year of the partnership that made the initial push-out election. An example in the preamble says that deadline would be September 15, 2021, for a partnership making a push-out election that has an adjustment year ending December 31, 2020.
The guidance imposes a time crunch on partnerships, Hani said, although he added that there should be enough time for all the passthrough partners to furnish the statements “as long as all the upper-level partnerships act properly and plan in advance.” Upper-tier partnerships could be short on time if a lower-tier partnership delays deciding whether to push out, he said. The time limitation is “an alert to the private sector to take steps to get everything done under the regulations in the required time,” Susswein said.
Shifting Liability
A positive aspect of the push-out regime is that a partnership making a push-out election is relieved of liability for the adjustment if it makes the election properly and complies with the other requirements, Hani said. “It’s the party that receives the statement that is now on the hook for any tax due or compliance failures,” he explained.
Prop. reg. section 301.6226-3(e)(2) provides that a passthrough partner that fails to push out an adjustment to its partners, or fails to pay the adjustment at the entity level, is required to pay the adjustment. There has been concern that the IRS may invalidate the initial push-out election if the passthrough partner fails to properly follow the requirements, Hani said. The proposed regs’ shifting of the liability for the adjustment to the passthrough partner “tempers criticisms about the amount of information that might be required to be included in the statement” furnished to passthrough partners and the IRS, he said.