[Federal Register Volume 82, Number 242 (Tuesday, December 19, 2017)]
[Proposed Rules]
[Pages 60144-60167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27071]
[[Page 60144]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[REG-120232-17; REG-120233-17]
RIN 1545-BO03; RIN 1545-BO04
Centralized Partnership Audit Regime: Rules for Election Under
Sections 6226 and 6227, Including Rules for Tiered Partnership
Structures, and Administrative and Procedural Provisions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations implementing
section 1101 of the Bipartisan Budget Act of 2015 (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. These proposed regulations
provide rules addressing how pass-through partners take into account
adjustments under the alternative to payment of the imputed
underpayment described in section 6226 and under rules similar to
section 6226 when a partnership files an administrative adjustment
request under section 6227. To make corresponding changes, these
proposed regulations amend portions of the previously proposed
regulations under sections 6226 and 6227. Additionally, these proposed
regulations provide rules regarding assessment and collection,
penalties and interest, and period of limitations under the new
centralized partnership audit regime. The proposed regulations also
address the rules for seeking judicial review of partnership
adjustments.
DATES: Written or electronic comments and requests for a public hearing
must be received by March 19, 2018.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-120232-17; REG-
120233-17), room 5207, Internal Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044. Submissions may be hand
delivered Monday through Friday between the hours of 8:00 a.m. and 4:00
p.m. to CC:PA:LPD:PR (REG-120232-17; REG-120233-17), Courier's Desk,
Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC
20224, or sent electronically via the Federal eRulemaking Portal at
www.regulations.gov (IRS REG-120232-17; REG-120233-17).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations
under sections 6225, 6231, and 6234 of the Internal Revenue Code, Joy
E. Gerdy-Zogby of the Office of Associate Chief Counsel (Procedure and
Administration), (202) 317-6834; concerning the proposed regulations
under sections 6227, 6232, and 6233, Steven L. Karon of the Office of
Associate Chief Counsel (Procedure and Administration), (202) 317-6834;
concerning the proposed regulations under sections 6226 and 6235,
Jennifer M. Black of the Office of Associate Chief Counsel (Procedure
and Administration), (202) 317-6834; concerning the submission of
comments and a request for a public hearing, Regina Johnson, (202) 317-
6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Procedure and
Administration Regulations (26 CFR part 301) under Subpart--Tax
Treatment of Partnership Items regarding how pass-through partners (as
defined in proposed Sec. 301.6241-1(a)(5)) take into account
adjustments under the alternative to payment of the imputed
underpayment described in section 6226 under the new centralized
partnership audit regime and under rules similar to section 6226 when a
partnership files an administrative adjustment request (AAR) under
section 6227. This document also contains proposed regulations
regarding assessment and collection, penalties and interest, periods of
limitations, and judicial review under the new centralized partnership
audit regime. The new regime was enacted into law by section 1101 of
the BBA, Public Law 114-74, as amended by the Protecting Americans from
Tax Hikes Act of 2015, Public Law 114-113, div. Q. The provisions of
section 1101 of the BBA are generally effective for partnership taxable
years beginning after December 31, 2017. See the temporary regulations
(TD 9780, 81 FR 51795) and the notice of proposed rulemaking (REG-
105005-16, 81 FR 51835) published in the Federal Register on August 5,
2016, regarding the election into the centralized partnership audit
regime for taxable years beginning after November 2, 2015 and before
January 1, 2018.
On June 14, 2017, a notice of proposed rulemaking (REG-136118-15)
was published in the Federal Register (82 FR 27334) (June 14 NPRM)
implementing the new centralized partnership audit regime. The June 14
NPRM contained rules regarding the scope and election out of the new
regime, consistent treatment by partners, the partnership
representative, partnership adjustments made by the IRS and
determination of the amount of the partnership's liability (referred to
as the imputed underpayment), AARs, and the election for partners to
take the partnership adjustments into account (sections 6221 through
6227 and section 6241 of the Internal Revenue Code (Code)). The rules
regarding how pass-through partners take into account adjustments under
the alternative to payment of the imputed underpayment described in
section 6226 and under rules similar to section 6226 under section 6227
were reserved in the June 14 NPRM. This document contains those
proposed rules and also re-proposes certain rules under section 6226,
including the imposition and computation of penalties that relate to
partnership adjustments. This document also contains proposed
regulations that supplement the June 14 NPRM by implementing the
administrative and procedural provisions of the new centralized
partnership audit regime (sections 6231 through 6235). For proposed
rules regarding international provisions under the centralized
partnership audit regime, see (REG-119337-17) published in the Federal
Register on November 30, 2017 (82 FR 56765) (November 30 NPRM).
1. Pass-Through Partners and the Section 6226 Push Out Election
Under section 6225, a partnership subject to the centralized
partnership audit regime is generally required to pay an imputed
underpayment with respect to adjustments to the partnership's items of
income, gain, loss, deduction, or credit, and any partner's
distributive share thereof. However, a partnership may elect under
section 6226 to have its partners for the year under audit (the
reviewed year partners) take the adjustments into account.
Proposed Sec. 301.6226-1 (June 14 NPRM) provides rules relating to
the election under section 6226 by a partnership to have its partners
take into account the partnership adjustments in lieu of paying the
imputed underpayment determined under section 6225 (the push out
election). Proposed Sec. Sec. 301.6226-2 and 301.6226-3 (June 14 NPRM)
provide rules for statements the partnership must send to its partners
for the reviewed year (as defined in proposed Sec. 301.6241-1(a)(8)
(June 14 NPRM)) and the computation and payment of the partners'
liabilities
[[Page 60145]]
as a result of taking into account the adjustments. Under proposed
Sec. 301.6226-1(b)(2) (June 14 NPRM), if a partnership makes the
election under section 6226 to push out the adjustments, the
partnership is not required to pay the imputed underpayment but is
instead required to furnish statements to ``each partner of the
partnership for the reviewed year.'' Those reviewed year partners are
then required to take the adjustments into account as provided under
section 6226(b).
The June 14 NPRM provides guidance on how a direct partner that is
not a pass-through partner (generally defined under proposed Sec.
301.6241-1(a)(5) (June 14 NPRM) as a partnership, an S corporation,
certain trusts, and a decedent's estate) takes the adjustments into
account under section 6226(b).
The June 14 NPRM reserved, however, on the issue of how the
adjustments are taken into account in the case of tiered partnership
structures by partners that are pass-through partners. The preamble to
the June 14 NPRM noted that the Treasury Department and the IRS were
considering an approach under section 6226 for tiered partnerships to
``push'' the adjustments beyond the first tier partners that would be
the subject of other proposed regulations to be published in the near
future. These are those proposed regulations.
In the June 14 NPRM, the Treasury Department and the IRS sought
comments on how the IRS might administer the requirements of section
6226 in tiered structures, including comments on reducing noncompliance
and collection risk in tiered structures, while at the same time
reducing costs of effective tax administration. The Treasury Department
and the IRS received numerous comments addressing the push out election
for tiered structures which uniformly requested that pass-through
partners be allowed to push out the adjustments under section 6226
beyond the first tier and through to the ultimate taxpaying partners or
owners.
Partnerships, as such, are not subject to tax under chapter 1 of
the Code with respect to items of income, gain, loss, deduction, and
credit. Rather, these items of the partnership are allocated to its
partners who then take them into account based on the partners' tax
characteristics, including entity classification. The June 14 NPRM
describes generally how adjustments to items of income, gain, loss,
deduction, or credit made with respect to a partnership subject to the
TEFRA partnership procedures flow through to the partnership's direct
and indirect partners for assessment and collection of the resulting
tax. Under certain circumstances, the assessment and collection of such
tax required the IRS to follow deficiency procedures after the
partnership-level proceeding. The enactment of the centralized
partnership audit regime changed this paradigm by introducing the
imputed underpayment, an entity-level liability, that is calculated
based on the adjustments to a partnership's items of income, gain,
loss, deduction, or credit, and that is assessed and collected at the
partnership level, rather than being assessed and collected from the
ultimate partners.
Section 6226 provides an alternative to the entity-level imputed
underpayment, allowing a partnership to elect under section 6226(a) to
push the adjustments out to its partners. In lieu of the partnership
paying the imputed underpayment, section 6226(a) provides that when a
push out election is made the reviewed year partners ``shall take such
adjustments into account'' as provided in section 6226(b). The language
of section 6226(b), however, does not distinguish between partners that
are subject to chapter 1 income taxes (for example, individuals and C
corporations) and pass-through partners (for example, partnerships and
S corporations), which are generally not subject to such taxes.
Accordingly, the precise question of how a pass-through partner takes
into account the adjustments when a partnership elects to push out the
adjustments to its partners is not addressed by section 6226(b).
As discussed in the preamble to the June 14 NPRM, section 6226(b)
could be interpreted to treat direct pass-through partners like
individuals, allowing the IRS to collect the resulting tax from those
direct pass-through partners without allowing them to push out the
adjustments past the first tier. See June 14 NPRM, 82 FR at 27364
(citing Joint Comm. on Taxation, JCS-1-16, General Explanations of Tax
Legislation Enacted in 2015, 70 (2016) (JCS-1-16)). Alternatively,
section 6226(b) could be interpreted to allow a pass-through partner to
take adjustments into account by passing the adjustments along to its
reviewed year partners through the tiers until reaching an ultimate
tax-paying owner. See June 14 NPRM, 82 FR at 27364-65. Technical
corrections to the centralized partnership audit regime introduced in
the last Congress, but not enacted, would have allowed pass-through
partners to take adjustments into account under section 6226(b) by
either paying an entity-level imputed underpayment or passing the
adjustments along to their reviewed year partners. See June 14 NPRM, 82
FR at 27365 (citing the Tax Technical Corrections Act of 2016, H.R.
6439, 114th Cong. (2016)).
After considering all of the comments, the Treasury Department and
the IRS have determined that adjustments pushed out to partners
pursuant to an election under section 6226 should be permitted to be
pushed out through the tiers to the ultimate tax-paying owners.
Accordingly, these proposed regulations provide rules for pushing the
adjustments through tiers of partners that are pass-through partners.
Under proposed Sec. 301.6241-1(a)(5) (June 14 NPRM), a ``pass-through
partner'' means a partnership (regardless of whether the partnership
made a valid election under section 6221(b) to elect out of the
centralized partnership audit regime), an S corporation, certain
trusts, and a decedent's estate.
As discussed more fully in the Explanation of Provisions section of
this preamble, the proposed regulations provide rules for pushing the
adjustments beyond the first tier. Under these rules, each pass-through
partner in an ownership chain is given a choice to either push the
adjustments to its partners, shareholders, or beneficiaries or pay tax
with respect to the adjustments. This optionality is consistent with
the framework of the centralized partnership audit regime where the
partnership under audit, or the partnership initiating its own
adjustments in an AAR, has the choice of either paying a tax amount
with respect to the adjustments or pushing the adjustments out to its
partners. It also provides maximum flexibility for each pass-through
partner in the chain to determine the best course for that partner
based on its own facts and circumstances.
The proposed regulations also provide a compliance mechanism to
ensure that the section 6226 election does not negatively impact tax
administration. As discussed in the June 14 NPRM, the centralized
partnership audit regime is designed to improve the IRS's ability not
only to audit partnerships, including large, tiered partnerships, but
also to efficiently collect the tax due as a result of the audit. The
centralized partnership audit regime has two main collection
mechanisms. First, section 6225 creates a default entity-level imputed
underpayment that the partnership must pay. Second, as an alternative
to payment of the imputed underpayment by the partnership under section
6225, section 6226 allows the partnership to move the collection point
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from the partnership to its partners for the reviewed year. If a
partnership complies with section 6226, the imputed underpayment
determined under section 6225 is extinguished. Section 6226(a). Section
6226 does not, however, extinguish the tax obligation with respect to
the adjustments underlying the imputed underpayment. Instead, the
partnership's partners for the reviewed year must also satisfy the
requirements of section 6226 with respect to the adjustments. Once the
partnership allocates the adjustments to each reviewed year partner and
sends the required statements under section 6226(a), the partners are
required to take the adjustments into account and, in the case of
partners that are not pass-through partners, pay the resulting tax
through self-reporting. Section 6226(b). Thus, section 6226 moves
assessment and collection from the partnership subject to the
administrative proceeding to its partners.
Because section 6226 is a collection provision, the IRS must be
able to collect any tax due as a result of the adjustments made at the
partnership level, even if those adjustments are pushed out through
multiple tiers of pass-through partners. Therefore, under a regime
where the partnership is allowed to push adjustments through the tiers,
there must be a feature that ensures compliance by each pass-through
partner in the chain of ownership. Without such a feature, non-
compliant entities in the tiers, and the current partners who control
those entities, could frustrate collection of the tax due as a result
of the partnership audit, and the section 6226 election would become a
means for avoidance of tax due with respect to adjustments determined
in the audit, undermining the centralized partnership audit regime
enacted under the BBA.
Therefore, these proposed regulations provide a mechanism to
address pass-through partners in the tiers that fail to comply with the
requirement to either push the adjustments out to their owners or pay
the tax resulting from the adjustments allocable to that partner. That
mechanism is to collect the tax due from the non-compliant pass-through
partner. This balances the ability for the tiered structure to push out
the partnership adjustments to the partnership's ultimate reviewed year
partners while ensuring collection under section 6226.
In cases where the pass-through partner chooses (or, in the case of
non-compliance, is required) to pay, the proposed regulations rely on
existing rules to determine how an entity that generally does not pay
chapter 1 tax would determine the amount due if that entity were to
take the adjustments into account. Under these proposed rules, the
pass-through partner calculates an amount in the same manner as the
imputed underpayment under section 6225 is computed with respect to the
partnership under audit, with some refinements, as described in more
detail in the Explanation of Provisions section of this preamble, to
reflect the fact that the adjustments are taken into account pursuant
to a section 6226 election.
2. Pass-Through Partners and Administrative Adjustment Requests
The June 14 NPRM also reserved on how pass-through partners in a
partnership that files an AAR take the adjustments into account under
``rules similar to the rules of section 6226.'' As discussed more fully
in the Explanation of Provisions section of this preamble, these
proposed regulations provide for rules similar to the regulations under
section 6226, with some minor changes to reflect the fact that an AAR
permits taxpayers to receive refunds of any tax overpaid and to reflect
that an AAR occurs outside of an examination.
3. Penalties in the Case of a Section 6226 Push Out Election
In the June 14 NPRM, the proposed regulations provide that defenses
to any penalties, additions to tax, or additional amounts must be
raised by the partnership during the partnership-level proceeding under
the centralized partnership audit regime, regardless of whether the
defense relates to facts and circumstances of the partnership or any
other person, including a partner in the partnership. Additionally,
those proposed regulations provide that penalties are calculated at the
partnership level, even if the partnership makes an election under
section 6226. As described more fully in the Explanation of Provisions
section of this preamble, those rules are not consistent with the
penalty rules proposed in these proposed regulations and, therefore,
the rules proposed in the June 14 NPRM are being revised accordingly.
4. Section 6226 Push Out Election and the Safe Harbor Amount
In the June 14 NPRM, the proposed regulations under section 6226
provide a safe harbor amount and interest safe harbor amount that
partners can pay in lieu of computing the tax and interest the partner
owes as a result of taking the adjustments into account in the year
under audit and determining the effect of this computation on tax
attributes in subsequent years. These safe harbor amounts were intended
to reduce the burden of the complex calculation of the tax and interest
due for the reviewed year and the intervening years. These rules were
crafted in light of the proposed regulations under section 6226 in the
June 14 NPRM, which did not yet provide rules for pushing the
adjustments out through multiple tiers of pass-through partners. During
the process of developing the rules to permit push out through multiple
tiers of pass-through partners, it became apparent that the safe harbor
rules no longer reduced burden. In fact, incorporating the safe harbor
rules into the rules for pushing through the tiers became more complex
and cumbersome than if the safe harbor amounts did not exist. In
particular, the safe harbor amounts increased the reporting burden on a
pass-through partner that elected to push the adjustments to its
partners without a meaningful reduction in burden on the recipient
partners. Accordingly, for these reasons, the proposed regulations
regarding the safe harbor amount and the interest safe harbor amount
have been amended to remove these provisions.
5. Administrative and Procedural Provisions Under the Centralized
Partnership Audit Regime
Section 6231(a) provides that the Secretary shall mail to the
partnership and the partnership representative (1) notice of any
administrative proceeding (NAP) initiated at the partnership level with
respect to an adjustment of any item of income, gain, loss, deduction,
or credit of a partnership for a partnership taxable year, or any
partner's distributive share thereof; (2) notice of any proposed
partnership adjustment (NOPPA) resulting from such proceeding; and (3)
notice of any final partnership adjustment (FPA) resulting from such
proceeding. These three notices also apply to any proceeding with
respect to an AAR filed by a partnership. Section 6231(a) further
provides that any FPA shall be mailed no earlier than 270 days after
the date on which the notice of the proposed partnership adjustment is
mailed and such notices are sufficient if mailed to the last known
address of the partnership representative or the partnership, even if
the partnership has terminated its existence.
Section 6225(a)(1) provides that in the case of any adjustment by
the Secretary in the amount of any item of income, gain, loss,
deduction, or credit of a partnership, or any partner's distributive
share thereof, the partnership shall pay any imputed underpayment with
respect to such
[[Page 60147]]
adjustment in the adjustment year (as defined in proposed Sec.
301.6241-1(a)(1) (June 14 NPRM)) as provided in section 6232.
Section 6232(a) provides that any imputed underpayment shall be
assessed and collected in the same manner as if it were a tax imposed
for the adjustment year by subtitle A of the Code, except that in the
case of an AAR to which section 6227(b)(1) applies, the underpayment
shall be paid when the AAR is filed.
Section 6232(b) provides that except as otherwise provided in
chapter 63 of the Code, no assessment of a deficiency may be made (and
no levy or proceeding in any court for the collection of any amount
resulting from such adjustment may be made, begun, or prosecuted)
before (1) the close of the 90th day after the day on which an FPA was
mailed and (2) if a petition for readjustment is filed under section
6234 with respect to such notice, the decision of the court has become
final. A partnership may, at any time (whether or not any notice of
partnership adjustment has been issued), by a signed notice in writing
filed with the Secretary waive this restriction on the making of any
partnership adjustment. Section 6232(d)(2).
Section 6232(c) provides that notwithstanding section 7421(a)
(regarding prohibition on suits to restrain assessment or collection),
any action that violates section 6232(b) may be enjoined in the proper
court, including the Tax Court. The Tax Court shall have no
jurisdiction to enjoin any action under subsection 6232(c) unless a
timely petition for readjustment has been filed under section 6234. If
a timely petition has been filed, the Tax Court has jurisdiction only
with respect to the adjustments that are the subject of such petition.
Section 6232(d) provides exceptions to the restrictions on making
partnership adjustments. Section 6232(d)(1)(A) provides the general
rule that if a partnership is notified that, on account of a
mathematical or clerical error appearing on the partnership return, an
adjustment to an item is required, rules similar to the rules of
paragraphs (1) and (2) of section 6213(b) (relating to assessments on
account of mathematical or clerical errors and abatement of such
assessments) shall apply to such adjustments. Section 6232(d)(1)(B)
provides a special rule that if a partnership is a partner in another
partnership, any adjustment on account of such partnership's failure to
comply with the requirements of section 6222(a) (requiring that a
partner, on its return, treat items attributable to a partnership in a
manner that is consistent with the treatment of such item on the
partnership return) with respect to its interest in such other
partnership shall be treated as an adjustment referred to in section
6232(d)(1)(A) except that paragraph (2) of section 6213(b) (providing
the ability to request an abatement of an assessment on account of a
mathematical or clerical error) shall not apply to such adjustment.
Section 6232(e) provides that if no proceeding under section 6234
is begun with respect to any FPA during the 90-day period described in
section 6232(b), the amount for which the partnership is liable under
section 6225 shall not exceed the amount determined in accordance with
such FPA.
Section 6233 provides rules related to interest and penalties with
respect to imputed underpayments. Except to the extent provided in
section 6226(c) (providing rules for penalties and interest where the
partnership elects under section 6226 the alternative to payment of the
imputed underpayment), the interest computed with respect to any
partnership adjustment for a reviewed year is the interest that would
be determined under chapter 67 of the Code for the period beginning on
the day after the return due date for the reviewed year and ending on
the return due date for the adjustment year or, if earlier, the date
payment of the imputed underpayment is made. Proper adjustments in the
amount of interest determined shall be made for adjustments required
for partnership taxable years after the reviewed year and before the
adjustment year by reason of such partnership adjustment. Section
6233(a)(1) and (2).
Except to the extent provided in section 6226(c), the partnership
shall be liable for any penalty, addition to tax, or additional amount
imposed with respect to any partnership adjustment for a reviewed year.
Any such penalty, addition to tax, or additional amount will be
determined at the partnership level as if the partnership had been an
individual subject to tax under chapter 1 of subtitle A of the Code for
the reviewed year and the imputed underpayment were an actual
underpayment (or understatement) for such year. Section 6233(a)(1) and
(3).
Section 6233(a)(2) provides that interest with respect to a
partnership adjustment for a reviewed year shall also take into account
adjustments required by reason of such partnership adjustment for
partnership taxable years after the reviewed year and before the
adjustment year. The meaning of this provision is not clear because
unless multiple years are audited, there may be no adjustments required
for taxable years other than the reviewed year. Because of this, the
proposed regulations do not address this language from the statute. The
IRS and the Treasury Department request comments about when and how
this language in section 6233(a)(2) may have effect.
In the case of any failure to pay an imputed underpayment on the
date prescribed therefor, the partnership shall be liable for interest
determined by treating the imputed underpayment as an underpayment of
tax imposed in the adjustment year. Section 6233(b)(1) and (2). In the
case of any failure to pay an imputed underpayment on the date
prescribed therefor, the partnership shall be liable for penalties,
additions to tax, or additional amounts determined by applying section
6651(a)(2) to such failure to pay and by treating the imputed
underpayment as an underpayment of tax for purposes of part II of
subchapter A of chapter 68 of the Code (relating to accuracy-related
and fraud penalties). Section 6233(b)(1) and (3).
Section 6234(a) provides that within 90 days after the date on
which an FPA is mailed under section 6231 with respect to any
partnership taxable year, the partnership may file a petition for
readjustment for such taxable year with the Tax Court, the district
court of the United States for the district in which the partnership's
principal place of business is located, or the Court of Federal Claims.
A petition for readjustment under section 6234 may be filed in a
district court of the United States or the Court of Federal Claims only
if the partnership filing the petition deposits with the Secretary, on
or before the date the petition is filed, the amount of the imputed
underpayment (as of the date of the filing of the petition) if the
partnership adjustment was made as provided by the FPA. Section
6234(b)(1). The court may by order provide that the jurisdictional
requirements of section 6234(b)(1) have been satisfied where there has
been a good faith attempt to satisfy such requirement and any shortfall
of the amount required to be deposited is timely corrected. Any such
amount deposited shall not, while deposited, be treated as a payment of
tax for purposes of the Code (other than chapter 67 of the Code
regarding interest). Section 6234(b)(2).
Under section 6234(c), a court with which a petition has been filed
in accordance with section 6234 has jurisdiction to determine all items
of income, gain, loss, deduction, or credit of the partnership for the
partnership
[[Page 60148]]
taxable year to which the notice of final partnership adjustment
relates as well as the proper allocation of such items among the
partners and the applicability of any penalty, addition to tax, or
additional amount for which the partnership may be liable under
subchapter C of chapter 63 of the Code. Any determination by a court
under section 6234 will have the force and effect of a decision of the
Tax Court or a final judgment or decree of the district court or the
Court of Federal Claims, as the case may be, and shall be reviewable as
such. The date of any such determination shall be treated as being the
date of the court's order entering the decision. Section 6234(d).
Section 6234(e) provides that if an action brought under section 6234
is dismissed other than by reason of a rescission under section
6231(c), the decision of the court dismissing the action shall be
considered as its decision that the FPA is correct, and an appropriate
order shall be entered in the records of the court.
Section 6235 provides the period of limitations on making
adjustments under the centralized partnership audit regime. Under
section 6235(a), the general rule is that no adjustment for any
partnership taxable year may be made after the later of three dates.
The first date is the date that is three years after the latest of (a)
the date on which the partnership return for such taxable year was
filed, (b) the return due date for the taxable year, or (c) the date on
which the partnership filed an AAR under section 6227 with respect to
such year. The second date is, in the case of any modification of the
imputed underpayment under section 6225(c), the date that is 270 days
(plus the number of days of any extension consented to by the Secretary
under section 6225(c)(7)) after the date on which everything required
to be submitted for purposes of modification is so submitted. The third
date is, in the case of any NOPPA issued under section 6231(a)(2), the
date that is 330 days (plus the number of days of any extension
consented to by the Secretary under section 6225(c)(7)) after the date
of such notice. Pursuant to section 6235(b), the period described in
section 6235(a) (including an extension period under section 6235(b))
may be extended by agreement entered into by the Secretary and the
partnership before the expiration of such period.
Section 6235(c) provides special rules in the case of fraud and
other situations. In the case of a false or fraudulent partnership
return with intent to evade tax or in the case of a failure by a
partnership to file a return for a taxable year, an adjustment may be
made at any time. Section 6235(c)(1) and (3). If any partnership omits
from gross income an amount properly includable in gross income and
such amount is described in section 6501(e)(1)(A) (describing
situations where more than 25 percent of gross income has been omitted
and situations where more than $5,000 of gross income attributable to
one or more assets to which information is required to be reported
under section 6038D has been omitted), the period under section 6235(a)
is applied by substituting ``six'' years for ``three'' years. Section
6235(c)(2). For purposes of section 6235, a return executed by the
Secretary under section 6020(b) (concerning returns executed by the
Secretary where a person fails to file a return required by the Code or
regulations) on behalf of a partnership shall not be treated as a
return of the partnership. Section 6235(c)(4).
If an FPA with respect to any taxable year is mailed under section
6231, the period of limitations on making adjustments under section
6235(a) shall be suspended for the 90-day period during which an action
may be brought under section 6234 (and, if a petition is filed under
section 6234 with respect to such FPA, until the decision of the court
becomes final) and for one year thereafter. Section 6235(d).
Explanation of Provisions
1. Pass-Through Partners and the Section 6226 Push Out Election
Proposed Sec. 301.6226-3(e)(1) provides that if a pass-through
partner is furnished a statement described in proposed Sec. 301.6226-2
(June 14 NPRM) (including a statement described in proposed Sec.
301.6226-3(e)(3)(i)), the pass-through partner must take into account
the adjustments reflected on that statement by either furnishing
statements to its partners that held an interest in the pass-through
partner at any time during the taxable year to which the adjustments
relate or by paying an amount calculated like an imputed underpayment
on the adjustments reflected in the statement plus any applicable
penalties and interest. As provided in proposed Sec. 301.6226-
3(e)(3)(i) and (iv), any statements furnished under these provisions
are treated as statements described in proposed Sec. 301.6226-2 (June
14 NPRM), and any pass-through partner receiving a statement under
proposed Sec. 301.6226-3(e)(3)(i) must also take the adjustments
reflected on the statement into account by furnishing statements to its
partners or paying an amount calculated like an imputed underpayment.
Thus, there is an iterative application of the rules under proposed
Sec. 301.6226-3(e) for tiered partnership structures allowing the
adjustments to be passed along through the tiers to the ultimate non-
pass-through partners who then must take the adjustments into account
under proposed Sec. 301.6226-3(a) and (b) (June 14 NPRM).
Under proposed Sec. 301.6226-3(e)(2), if a pass-through partner
fails to timely take into account the adjustments in accordance with
proposed Sec. 301.6226-3(e)(3) or (e)(4), the pass-through partner
must take into account the adjustments by paying an amount calculated
like an imputed underpayment plus any applicable penalties and
interest, in accordance with the rules provided under proposed Sec.
301.6226-3(e)(4). As discussed in the Background section of this
preamble, this rule is necessary to prevent tiered structures from
electing to push out the adjustments to inappropriately shift the
burden of collecting the tax due back to the IRS and to avoid paying
the tax owed after completion of a partnership audit. Such behavior
would frustrate the orderly administration of the election under
section 6226 and the collection efforts of the IRS. Without imposing an
entity-level liability against those pass-through entities that fail to
pay or push out, there would be a disincentive to take any action upon
receipt of a push out statement causing the push out election to become
a potential vehicle for non-compliance and abuse. Such a result
undermines the efficiencies and increased collections intended by
enactment of the centralized partnership audit regime.
The additional burden placed on the IRS of locating the partners of
pass-through partners, determining the proper allocation of
adjustments, and assessing the resulting tax, if any, would frustrate
tax administration in the same manner as the TEFRA partnership
procedures, which were administratively untenable. The rule that
requires a pass-through partner to pay an amount calculated like an
imputed underpayment if it fails to take the adjustments into account
significantly alleviates administrative burden, comports with an
iterative application of section 6226, and furthers the purpose of the
statute by eliminating the ability for a partner to increase costs and
inefficiencies of tax administration by failing to comply with the
statute.
Proposed Sec. 301.6226-3(e)(3) provides the rules for a pass-
through partner to take into account the adjustments in the statements
furnished to it under proposed Sec. 301.6226-2 (June 14 NPRM)
[[Page 60149]]
by furnishing statements to its own partners. Under proposed Sec.
301.6226-3(e)(3)(i), a pass-through partner takes the adjustments into
account by furnishing statements to each person who was a partner in
the pass-through partner at any time during the taxable year of the
pass-through partner to which the adjustments in the statement relate
(the ``affected partner''). The statements furnished to the affected
partners must include all of the information prescribed by proposed
Sec. 301.6226-3(e)(3)(iii), and the pass-through partner must file the
statements with the IRS, along with a transmittal that includes a
summary of the statements and any other information required by forms,
instructions, and other guidance. Additionally, the rules applicable to
statements furnished under proposed Sec. 301.6226-2 (June 14 NPRM) are
generally applicable to statements furnished under proposed Sec.
301.6226-3(e)(3)(i). For example, the rules regarding the address used
for the statements mailed to affected partners (proposed Sec.
301.6226-2(b)(2) (June 14 NPRM)) and the correction of statements
(proposed Sec. 301.6226-2(d) (June 14 NPRM)) apply to statements
furnished under proposed Sec. 301.6226-3(e)(3)(i). However, there are
different rules regarding the time for filing and furnishing the
statements under proposed Sec. 301.6226-3(e)(3)(i), the content of
those statements, and how partners of the pass-through partner take the
adjustments into account because the partner of the pass-through
partner is not receiving the statement directly from the source
partnership.
Under proposed Sec. 301.6226-3(e)(3)(ii), statements must be
furnished no later than the extended due date for the return for the
adjustment year of the partnership that made the election under
proposed Sec. 301.6226-1 (June 14 NPRM). For purposes of determining
the due date for the statements, the extended due date for the return
for the adjustment year of the partnership that made the election under
proposed Sec. 301.6226-1 (June 14 NPRM) is the extended due date under
section 6081, regardless of whether the partnership that made the
election under proposed Sec. 301.6226-1 (June 14 NPRM) is required to
file a return for the adjustment year and regardless of whether an
extension was actually requested. For example, if the adjustment year
of the partnership that made the election under proposed Sec.
301.6226-1 (June 14 NPRM) ended on December 31, 2020, the pass-through
partner would be required to furnish statements to its affected
partners no later than September 15, 2021, the due date, including
extensions, of a partnership return for a taxable year ending December
31, 2020. If a pass-through partner fails to issue statements by the
due date under proposed Sec. 301.6226-3(e)(3)(ii), the pass-through
partner has failed to take into account the adjustments as described in
proposed Sec. 301.6226-3(e)(3).
The statements furnished to the affected partners must contain all
of the information described in proposed Sec. 301.6226-3(e)(3)(iii)
and any other information required by the forms, instructions, or other
guidance prescribed by the IRS. This information is necessary for an
affected partner to take into account the adjustments reflected in the
statement furnished to the partner under these provisions in the
correct year, to identify the source of the adjustments, and for any
affected partner that is also a pass-through partner to be able to take
into account the adjustments under these provisions by the applicable
due dates.
Proposed Sec. 301.6226-3(e)(3)(iv) provides that the statements
furnished to the affected partners in accordance with proposed Sec.
301.6226-3(e)(3) are treated as if they were statements furnished under
proposed Sec. 301.6226-2 (June 14 NPRM). Accordingly, an affected
partner must take into account the adjustments as if the affected
partner were a reviewed year partner. Under certain circumstances, the
statements furnished to the affected partners may not be furnished
until after the unextended due date of the affected partners' returns
for the reporting year. To account for this situation, proposed Sec.
301.6226-3(e)(3)(iv) provides that the IRS will not impose any
additions to tax under section 6651 related to any additional reporting
year tax if the affected partner reports and pays any additional
reporting year tax within 30 days of the due date for furnishing the
statements to the affected partners under proposed Sec. 301.6226-
3(e)(3)(ii).
Finally, proposed Sec. 301.6226-3(e)(3)(v) provides special rules
for adjustments subject to withholding under chapters 3 and 4 of the
Code. Consistent with the regulations proposed in the November 30 NPRM
(regarding certain international tax rules under the centralized
partnership audit regime), under proposed Sec. 301.6226-3(e)(3)(v), if
a pass-through partner takes the adjustments into account by furnishing
statements under proposed Sec. 301.6226-3(e)(3), the pass-through
partner must comply with proposed Sec. 301.6226-2(h)(3) (November 30
NPRM) (providing rules for the payment of tax under chapters 3 and 4
when adjustments are pushed out), and an affected partner must comply
with proposed Sec. 301.6226-3(f) (November 30 NPRM) (providing rules
for partners subject to withholding under chapters 3 and 4) as if the
pass-through partner were the partnership that made the election under
proposed Sec. 301.6226-1 (June 14 NPRM) and the affected partner were
the reviewed year partner.
Proposed Sec. 301.6226-3(e)(4) provides rules for pass-through
partners that take into account the adjustments reflected in a
statement furnished under proposed Sec. 301.6226-2 (June 14 NPRM) by
making a payment. Under proposed Sec. 301.6226-3(e)(4), a pass-through
partner takes the adjustments into account by paying an amount computed
like an imputed underpayment under section 6225 and any penalties and
interest and by providing to the IRS the information required by forms,
instructions, or other guidance.
Under proposed Sec. 301.6226-3(e)(4)(ii), all amounts required to
be paid by a pass-through partner must be paid no later than the
extended due date for the return for the adjustment year of the
partnership that made the election under proposed Sec. 301.6226-1
(June 14 NPRM). The due date for paying the amounts required under
proposed Sec. 301.6226-3(e)(4)(i) is the same as the due date for
furnishings statements to partners under proposed 301.6226-
3(e)(3)(iii). If a pass-through partner fails to pay and submit the
required information by the due date, the pass-through partner has
failed to take into account the adjustments as described in proposed
Sec. 301.6226-3(e)(4).
Proposed Sec. 301.6226-3(e)(4)(iii) provides that the amount
required to be paid by the pass-through partner is calculated in the
same manner as an imputed underpayment under section 6225 and proposed
Sec. 301.6225-1 (June 14 NPRM) as if the adjustments reflected on the
statement furnished to the pass-through partner were partnership
adjustments for the first affected year. The pass-through partner must
calculate a payment amount for the first affected year as well as a
payment amount for any intervening year by treating the pass-through
partner's share of partnership tax attributes for each intervening year
as partnership adjustments for that intervening year. In addition, the
pass-through partner can take into account modifications approved by
the IRS during the audit of the partnership that made the election
under proposed Sec. 301.6226-1 (June 14 NPRM) and reflected on the
statement when determining the payment amount. This will result in a
payment amount that
[[Page 60150]]
more closely approximates the tax that would have been due by the
partners of the pass-through partner had the adjustments been reported
correctly on the reviewed year return. For instance, if the IRS
approved a modification for an indirect partner (as defined in proposed
Sec. 301.6241-1(a)(4) (June NPRM)) that is a tax-exempt entity, the
payment amount computed like an imputed underpayment would be
calculated by excluding the adjustments attributable to that tax-exempt
indirect partner.
Proposed Sec. 301.6226-2(e) (June 14 NPRM) provides that the only
modifications that must be included on statements are modifications
based on an amended return filed or a closing agreement entered into by
the reviewed year partner. Proposed Sec. 301.6226-2(e)(5) (June 14
NPRM) is amended. Newly proposed Sec. 301.6226-2(e)(5) expands this
rule to require that all modifications approved with respect to the
reviewed year partner (including any indirect partner that holds its
interest in the partnership making the push out election through that
reviewed year partner) be included on the statement. This proposed rule
was changed to facilitate the calculation of the payment amount under
the rules for push out to pass-through partners under proposed Sec.
301.6226-3(e)(4)(iii). To further effectuate this change, proposed
Sec. 301.6226-2(f)(2) (June 14 NPRM) is also amended in this notice of
proposed rulemaking.
A pass-through partner that takes the adjustments into account in
accordance with proposed Sec. 301.6226-3(e)(4) must also calculate and
pay any applicable penalties, additions to tax, and additional amounts.
The statement furnished to the pass-through partner must provide
information about any penalties applicable to the adjustments allocated
to that partner. The pass-through partner calculates the penalties,
additions to tax, or additional amounts as if the payment amount
required under proposed Sec. 301.6226-3(e)(4)(i)(A) were an imputed
underpayment due in the first affected year or any intervening year, as
applicable. The pass-through partner must also pay any interest in
accordance with proposed Sec. 301.6226-3(d) (June 14 NPRM) as if the
amount required under proposed Sec. 301.6226-3(e)(4)(i)(A) were due in
the first affected year or any intervening year, as applicable.
In calculating the payment amount as if it were an imputed
underpayment, there could be adjustments that would not result in an
imputed underpayment (as defined in proposed Sec. 301.6225-1(c)(2)
(June 14 NPRM)). In these cases, the pass-through partner takes into
account the adjustments that do not result in an imputed underpayment
in a manner similar to the rule in proposed Sec. 301.6225-3 (June 14
NPRM), but in the taxable year of the partnership that includes the
date the partnership makes a payment under proposed Sec. 301.6226-
3(e)(4)(i), or if the partnership has no liability when taking the
adjustments into account under proposed Sec. 301.6226-3(e)(4), in the
taxable year that includes the date the partnership is furnished the
statement.
Proposed Sec. 301.6226-3(e)(4)(vi) provides rules for coordination
with chapters 3 and 4 of the Code. If a pass-through partner pays an
amount as described in proposed Sec. 301.6226-3(e)(4)(i), proposed
Sec. 301.6225-1(a)(4) (November 30 NPRM) applies to the pass-through
partner as if the pass-through partner were the partnership that made
the election under proposed Sec. 301.6226-1 (June 14 NPRM).
Accordingly, payment of the amount by the pass-through partner means
the pass-through partner is treated as having paid the amount required
to be withheld with respect to those adjustments under chapters 3 and 4
for purposes of applying Sec. Sec. 1.1463-1 and 1.1474-4.
Proposed Sec. 301.6226-3(e)(5) clarifies that for purposes of the
rules applicable to pass-through partners, S corporations, certain
trusts, and estates are treated as a partnership, and their
shareholders and beneficiaries are treated as partners. Imposing an
amount calculated like an imputed underpayment on all non-compliant
pass-through partners is consistent with the iterative application of
section 6226 and ensures that the collection burden of a section 6226
election is not inappropriately shifted to the IRS. Accordingly, the
rules of proposed Sec. 301.6226-3(e) generally apply equally to all
pass-through partners, whether they are partnerships, S corporations,
certain type of trusts, or estates.
The term ``pass-through partner'' as defined in proposed Sec.
301.6241-1(a)(5) (June 14 NPRM), includes entities that are subject to
chapter 1 tax under certain circumstances. For example, certain S
corporations are liable for the built-in gains tax under section 1374.
Trusts and estates may also be required to take certain items into
account at the entity level and pay tax under certain circumstances,
but in other circumstances trusts and estates do not take items into
account at the entity level. Instead, the items flow through to their
beneficiaries. To account for this, proposed Sec. 301.6226-3(e)(6)
provides a specific rule to address how these types of entities take
into account the adjustments. Under proposed Sec. 301.6226-3(e)(6), a
pass-through partner must calculate any additional reporting year tax
under proposed Sec. 301.6226-3(b) (June 14 NPRM) in the same manner as
any other non-pass-through partner. Additionally, if the pass-through
partner would be required under chapter 1 to pay tax on only a portion
of the adjustments (or a portion of a single adjustment) and flow some
or all of the remaining adjustments to its owners or beneficiaries, the
proposed regulations accommodate this situation by requiring the pass-
through partner to furnish statements to its partners reflecting the
adjustments that are properly taken into account by the pass-through
partner's owners. For instance, if a trust is a pass-through partner
and could be subject to tax under chapter 1 with respect to a
partnership adjustment, the trust must calculate and pay its additional
reporting year tax as if it were a non-pass through partner. In
addition, if it would also be required under ordinary trust reporting
rules to report adjustments to its beneficiaries as a result of taking
the adjustments into account, the trust must report those adjustments
to its beneficiaries who also must take the adjustments into account
under proposed Sec. 301.6226-3 (June 14 NPRM). Finally, proposed Sec.
301.6226-3(e)(6) clarifies that if a pass-through partner that is
subject to tax under chapter 1 fails to comply with the provisions of
proposed Sec. 301.6226-3(e)(6), the rules of proposed Sec. 301.6226-
3(e)(2) apply, and the pass-through partner will be required to take
into account the adjustments under proposed Sec. 301.6226-3(e)(4).
Proposed Sec. 301.6226-3(j) clarifies that in the case of a
disregarded entity or a trust that is a wholly-owned trust (if the
trust reports the owner's information to payors under Sec. 1.671-
4(b)(2)(i)(A)), the owner of the disregarded entity or the trust must
take into account the partnership adjustments. For instance, in the
case of a disregarded entity wholly-owned by a C corporation, the C
corporation must take into account the adjustments reflected on a
statement furnished to the disregarded entity under proposed Sec.
301.6226-2 (June 14 NPRM). Accordingly, a partner that is a disregarded
entity or wholly-owned trust is disregarded for purposes of taking the
adjustments into account under proposed Sec. 301.6226-3(j).
In addition to proposing Sec. 301.6226-3(e), this notice of
proposed rulemaking also adds examples in proposed Sec. 301.6226-3(g)
to illustrate the concepts of proposed Sec. 301.6226-3(e).
[[Page 60151]]
2. Adjustments Requested in an Administrative Adjustment Request Taken
Into Account by a Pass-Through Partner
These proposed regulations also provide rules for pass-through
partners to take into account adjustments requested in an AAR if the
partnership elects to have its partners take into account the
adjustments (or if the partnership is required to have its partners
take into account the adjustments). The proposed regulations generally
follow the rules in proposed Sec. 301.6226-3(e), with modifications to
accommodate the rules applicable to AARs.
3. Penalties, Additions to Tax, and Additional Amounts in the Case of
Section 6226 Push Out Election
Proposed Sec. 301.6226-3(i) provides the rules for the calculation
of penalties, additions to tax, and additional amounts by the partner
when a partnership has made an election under section 6226. The
applicability of any penalties, additions to tax, and additional
amounts with respect to a partnership adjustment are determined at the
partnership level in accordance with section 6221(a). Under proposed
Sec. 301.6226-3(i)(2), when each partner takes the adjustments into
account under section 6226 and proposed Sec. 301.6226-3 (June 14
NPRM), the partner must compute any penalties, additions to tax, or
additional amounts applying any applicable rules or thresholds based on
the particular facts and circumstances of that partner as if each
correction amount were an underpayment or understatement for the first
affected year (or intervening year, if applicable). Changes were made
to other provisions in the June 14 NPRM to conform to the addition of
proposed Sec. 301.6226-3(i).
Proposed Sec. 301.6226-3(i)(3) provides that a partner may assert
a defense against a penalty based on a defense that is personal to the
partner (partner-level defense), such as reasonable cause or good
faith, by first paying the tax and penalty due and then filing a claim
for refund that asserts the partner's specific penalty defense.
Proposed Sec. 301.6226-2(e)(7) (June 14 NPRM) is amended in this
notice of proposed rulemaking. Under proposed Sec. 301.6226-2(e)(7)
(as modified in these proposed regulations), instead of providing the
reviewed year partner's share of any penalties, additions to tax, or
additional amounts on the statement furnished to the reviewed year
partner under proposed Sec. 301.6226-2 (June 14 NPRM), the partnership
provides the applicability of any penalty, additions to tax, or
additional amounts and the adjustments to which those penalties,
additions to tax, or additional amounts relate. Under this proposed
rule, the partnership furnishes the reviewed year partner the reviewed
year partner's share of the adjustments to which the penalties,
additions to tax, and additional amounts relate and other information
such as the applicable rate of any penalty and the Code section under
which the penalty, addition to tax, or additional amount was imposed.
Proposed Sec. 301.6226-3(b)(4) (June 14 NPRM) is amended by
removing the last sentence from the June 14 NPRM, which read ``A
deficiency dividend deduction under this paragraph (b)(4) and section
860(a) has no effect on a QIE's liability for any penalties reflected
in a statement described in Sec. 301.6226-2(a).'' This change reflects
that, under proposed Sec. 301.6226-3(i), a partner who is furnished a
statement under proposed Sec. 301.6226-2 (June 14 NPRM) is not
furnished its share of the penalty amount determined at the partnership
level but instead must calculate the penalty utilizing the normal
penalty rules applicable under the Code.
Proposed Sec. 301.6226-3(a) (June 14 NPRM) is amended below. The
amended Sec. 301.6226-3(a) changes the requirement that reviewed year
partners pay the reviewed year partner's share of any penalties,
additions to tax, or additional amounts, to a requirement that the
reviewed year partner must calculate and pay any penalties, additions
to tax, or additional amounts as determined under proposed Sec.
301.6226-3(i). In addition, proposed Sec. 301.6226-3(d)(3) (June 14
NPRM) regarding interest on penalties is amended below. Amended Sec.
301.6226-3(d)(3) conforms to the addition of proposed Sec. 301.6226-
3(i) by providing that the reviewed year partner calculates and pays
interest on any penalties, additions to tax, or additional amounts
calculated by the partner instead of on the share of penalties,
additions to tax, or additional amounts reflected in the statement
furnished to the partner.
Finally, Example 1 in proposed Sec. 301.6226-3(g) (June 14 NPRM)
and Example 6 in proposed Sec. 301.6226-3(g) (November 30 NPRM) are
amended below with changes that conform to proposed Sec. 301.6226-
3(i).
4. Changes to the June 14 NPRM to Reflect the Removal of the Safe
Harbor
As described in the Background section of this preamble, these
proposed regulations amended proposed Sec. 301.6226-2(g) (June 14
NPRM) and proposed Sec. 301.6226-3(c) and (d)(2) (June 14 NPRM) which
concern the calculation of, and the election to pay, the safe harbor
amount and interest safe harbor amount. In addition, these proposed
regulations make conforming changes to the proposed rules in the June
14 NPRM to reflect the removal of the safe harbor amount and interest
safe harbor amount. Proposed Sec. Sec. 301.6226-1(d), 301.6226-3(a),
and 301.6227-3(b)(1) (June 14 NPRM) are amended below. Finally,
Examples 1, 2, 3, 4, and 5 in proposed Sec. 301.6226-3(g) (June 14
NPRM) and Example 6 in proposed Sec. 301.6226-3(g) (November 30 NPRM)
are amended to reflect the removal of the safe harbor and interest safe
harbor. See Examples 1, 2, 3, 4, 5 and 6 of proposed Sec. 301.6226-
3(g).
5. Notices of Proceedings and Adjustments
Proposed Sec. 301.6231-1 provides rules with respect to the NAP
described in section 6231(a)(1), the NOPPA described in section
6231(a)(2), and the FPA described in section 6231(a)(3). Under proposed
Sec. 301.6231-1(c), such notices are sufficient if mailed to the last
known address of the partnership and the partnership representative. An
FPA may not be mailed earlier than 270 days after the date on which the
NOPPA was mailed. Proposed Sec. 301.6231-1(b)(2) permits a partnership
to waive this restriction to allow the IRS to mail the FPA before the
expiration of the 270-day period.
Nothing in the centralized partnership audit regime limits the
period for IRS to propose adjustments, and section 6231 does not
restrict when a NOPPA may be mailed by the IRS. However, a reasonable
time limit within which partnership adjustments must be proposed under
the centralized partnership audit regime will provide certainty to
partnerships and the IRS. Partnerships will know when a taxable year is
no longer subject to audit, and the IRS will be better able to allocate
resources for examinations under the centralized partnership audit
regime. Accordingly, proposed Sec. 301.6231-1(b)(1) imposes a time
limit on when adjustments may be proposed for a particular taxable year
by providing that a NOPPA may not be mailed after the expiration of the
period described in section 6235(a)(1), including any extensions of
that period and after applying any of the special rules in section
6235(c) (providing additional time for situations where no return is
filed, fraud, etc.). Once a NOPPA is mailed, the time period for
mailing the FPA in order to make a final partnership adjustment is
generally governed by section 6235(a)(2) or (3).
[[Page 60152]]
Proposed Sec. 301.6231-1(f) and (g) provide rules for withdrawal
of a NAP or a NOPPA and rescission of an FPA. Section 6231(c) provides
that rescission of ``any notice of a partnership adjustment'' requires
consent of the partnership. Because the NAP merely notifies the
partnership of the initiation of an examination and the NOPPA only
proposes an adjustment, neither of these notices is a notice of a
partnership adjustment for purposes of the consent requirement in
section 6231(c). Accordingly, proposed Sec. 301.6231-1(g) requires
consent of the partnership before rescission of an FPA, but proposed
Sec. 301.6231-1(f) does not require consent of the partnership before
withdrawing a NAP or a NOPPA.
In the November 30 NPRM, the Treasury Department and the IRS
discussed the coordination of the special rules in section 905(c)
(relating to certain adjustments to foreign tax credits) with the
centralized partnership audit regime. The Treasury Department and the
IRS specifically requested comments regarding whether the AAR process
can be utilized for purposes of satisfying the notification
requirements of section 905(c) with respect to foreign tax
redeterminations relating to a foreign tax reported by a partnership as
a creditable foreign tax expenditure. If the AAR process can be used,
section 905(c) would possibly represent an exception to the normal
timing rules discussed in the Explanation of Provisions section of this
preamble, just as it represents a departure from the ordinary timing
rules in circumstances outside the scope of the centralized partnership
audit regime. If the AAR process can be adopted for section 905(c)
purposes, these proposed regulations may be modified in separate
guidance to account for that process.
6. Assessment, Collection, and Payment of Imputed Underpayments
Proposed Sec. 301.6232-1(a) restates the rule in section 6232(a)
that any imputed underpayment determined under the centralized
partnership audit regime must be assessed and collected as if the
imputed underpayment were a tax imposed by subtitle A of the Code for
the adjustment year. However, proposed Sec. 301.6232-1(a) also
clarifies that because the centralized partnership audit regime under
subchapter C of chapter 63 applies, the deficiency procedures under
subchapter B of chapter 63 do not apply to an assessment of an imputed
underpayment. Section 6232(b) and proposed Sec. 301.6232-1(c)
explicitly provide the limitations on assessments under the centralized
partnership audit regime. Generally, an imputed underpayment determined
by the IRS may be assessed only after the IRS sends an FPA, and the
partnership has a chance to seek judicial review.
Proposed Sec. 301.6232-1(d)(1) describes exceptions to the
restrictions on assessment, including the rules for assessment of
amounts attributable to partnership adjustments on account of
mathematical or clerical errors or where a partnership-partner (as
defined in proposed Sec. 301.6241-1(a)(7) (June 14 NPRM)) is treated
as if it had a mathematical or clerical error on its return because it
failed to treat items consistently with the partnership's treatment of
the items pursuant to section 6222(a). Any resulting assessment of an
imputed underpayment attributable to that adjustment is not subject to
the limitations under section 6232(b) and proposed Sec. 301.6232-1(c),
and therefore may be assessed without the issuance of an FPA.
Under proposed Sec. 301.6232-1(d)(1)(ii)(A), the partnership
generally has 60 days to request abatement of the assessment
attributable to the mathematical or clerical error, and the IRS must
abate the assessment. Consistent with section 6232(d), under proposed
Sec. 301.6232-1(d)(1)(ii)(B), this rule does not apply if the
assessment is attributable to an adjustment of an inconsistent item on
a partnership-partner's return. However, the IRS intends to develop
pre-assessment processes to provide the partnership-partner with an
opportunity to correct the inconsistency by filing an AAR under section
6227 or, in situations where the partnership-partner has made an
election under section 6221(b), an amended partnership return.
Therefore, proposed Sec. 301.6232-1(d)(1)(ii)(B) provides that prior
to assessment a partnership-partner that has failed to comply with
section 6222(a) may correct the inconsistency by filing an AAR under
section 6227 or an amended partnership return, as appropriate.
Additionally, proposed Sec. 301.6232-1(d)(1)(ii)(B) authorizes a
partnership-partner that has elected out of the centralized partnership
audit regime under section 6221(b) to furnish amended statements to its
partners. This rule provides the consent required by section 6031(b),
which prohibits a partnership from amending information required to be
furnished by the partnership to its partners after the due date of the
return, except as provided by the IRS.
Proposed Sec. 301.6232-1(d)(1)(iii) addresses the situation in
which a partnership-partner that elected out of the centralized
partnership audit regime pursuant to section 6221(b) for the reviewed
year has failed to comply with section 6222(a). Under proposed Sec.
301.6232-1(d)(1)(iii), any tax resulting from an adjustment due to such
partnership-partner's failure to comply with section 6222(a) may be
assessed against the partners (or indirect partners) of the
partnership-partner. The tax may be assessed in the same manner as if
the tax were on account of a mathematical or clerical error appearing
on the partner's or indirect partner's return. In accordance with
section 6232(d)(1)(B), the procedures under section 6213(b)(2) for
requesting abatement of such an assessment will not apply.
7. Interest and Penalties Related to Imputed Underpayments
A. Interest and Penalties Determined From the Reviewed Year
Proposed Sec. 301.6233(a)-1(a) provides that except to the extent
provided in section 6226(c) and the regulations thereunder, in the case
of a partnership adjustment for a reviewed year of the partnership, a
partnership is liable for interest as computed under proposed Sec.
301.6233(a)-1(b) and for any penalty, addition to tax, or additional
amount as determined in proposed Sec. 301.6233(a)-1(c).
Proposed Sec. 301.6233(a)-1(b) provides that interest with respect
to an imputed underpayment is the interest that would be imposed under
chapter 67 of the Code if the imputed underpayment were treated as an
underpayment of tax for the reviewed year. Proposed Sec. 301.6233(a)-
1(b) further provides that interest on such imputed underpayment begins
on the day after the due date of the partnership return for the
reviewed year and ends on the earlier of the date prescribed for
payment (as described in proposed Sec. 301.6232-1(b)), the return due
date of the partnership return for the adjustment year, or the date the
imputed underpayment is fully paid by the partnership.
Proposed Sec. 301.6233(a)-1(c)(1) provides that the penalties,
additions to tax, or additional amounts determined with respect to a
partnership adjustment are those penalties, additions to tax, or
additional amounts that would be imposed under part II of subchapter A
of chapter 68 of the Code by treating the imputed underpayment as an
underpayment (or understatement) of tax for the reviewed year and by
treating the partnership as if it had been an individual subject to tax
imposed by chapter 1 of subtitle A of the Code for the reviewed year.
[[Page 60153]]
Proposed Sec. 301.6233(a)-1(c)(2) coordinates the rules for
determining penalties related to imputed underpayments with the
accuracy-related and fraud penalties under sections 6662, 6662A, and
6663. Proposed Sec. 301.6233(a)-1(c)(2)(ii) provides rules to
determine the portion of an imputed underpayment subject to penalties
when there is at least one adjustment with respect to which no penalty
has been imposed and at least one with respect to which a penalty has
been imposed, or where there are at least two adjustments with respect
to which penalties have been imposed and the penalties have been
imposed at different rates. The rules under proposed Sec. 301.6233(a)-
1(c)(2)(ii) extend the existing ordering rules under Sec. 1.6664-3 to
partnerships subject to the centralized partnership audit regime.
Proposed Sec. 301.6233(a)-1(c)(2)(ii)(B) provides that when
computing the portion of the imputed underpayment subject to penalties
under sections 6662, 6662A, and 6663, partnership adjustments that did
not result in the imputed underpayment are not taken into account. To
determine the portion of the imputed underpayment subject to a penalty,
partnership adjustments are first grouped together according to whether
the adjustments are subject to penalty and if so, by rate of penalty.
Negative adjustments as defined in proposed Sec. 301.6233(a)-
1(c)(2)(ii)(C) are included in these groupings according to the
allocation rule in proposed Sec. 301.6233(a)-1(c)(2)(ii)(D) and are
netted against the positive adjustments within each grouping to the
extent provided in proposed Sec. 301.6233(a)-1(c)(2)(ii)(E). After
grouping the partnership adjustments, each non-credit adjustment within
a grouping is multiplied by the rate that applied to such adjustment
when determining the imputed underpayment. After the appropriate rate
is applied to each adjustment, the results within a grouping are
totaled. The total within each grouping is then adjusted to account for
any credit adjustments. The result is the portion of the imputed
underpayment that is subject to the penalty rate corresponding to the
grouping.
Proposed Sec. 301.6233(a)-1(c)(2)(ii)(F) through (iv) provide
clarifying rules for applying the penalties for fraud under section
6663, reportable transaction understatements under section 6662A, and
substantial understatements of tax under section 6662(d) to imputed
underpayments determined under the centralized partnership audit
regime.
Proposed Sec. 301.6233(a)-1(c)(2)(v) provides rules for
application of the reasonable cause and good faith exception to the
penalties under sections 6662, 6662A, and 6663. See sections 6664(c)
and (d). Proposed Sec. 301.6233(a)-1(c)(2)(v) provides that for these
purposes the partnership is treated as the taxpayer and, therefore, the
facts and circumstances taken into account in determining whether the
partnership has established reasonable cause and good faith are those
facts and circumstances applicable to the partnership. This may include
facts and circumstances with respect to partners or other individuals
acting on behalf of the partnership. In addition, proposed Sec.
301.6233(a)-1(c)(2)(v) provides that any partner-level defense, for
example a reasonable cause defense that is based on the personal
circumstances of the partner, will not be considered in a partnership-
level proceeding except in accordance with the amended return and
closing agreement modification procedures set forth in the regulations
under section 6225(c) and proposed Sec. 301.6225-2 (June 14 NPRM).
B. Interest and Penalties From the Adjustment Year
Proposed Sec. 301.6233(b)-1(a) provides rules that apply when a
partnership fails to pay an imputed underpayment by the date prescribed
for such payment. In the case of such a failure, proposed Sec.
301.6233(b)-1(a) provides that the partnership is liable for interest,
as well as any penalties, additions to tax, and additional amounts as
determined under proposed Sec. 301.6233(b)-1(b) and (c). Proposed
Sec. 301.6233(b)-1(b) clarifies that these rules apply to the portion
of an imputed underpayment resulting from partnership adjustments
determined by the IRS under section 6225(a)(1) that is unpaid after the
date prescribed for payment under proposed Sec. 301.6232-1(b) (the
date stated in a notice and demand) and to the portion of an imputed
underpayment resulting from adjustments requested by the partnership in
an AAR under section 6227 that is unpaid after the date the AAR is
filed.
8. Judicial Review of Partnership Adjustments
Proposed Sec. 301.6234-1 provides rules relating to judicial
review of partnership adjustments. Proposed Sec. 301.6234-1(b) and (c)
describe the jurisdictional deposit requirement for partnerships that
wish to bring an action in a United States district court or the Court
of Federal Claims and explain how the jurisdictional deposit is treated
for purposes of the Code. Under proposed Sec. 301.6234-1(c), although
the deposit is not generally treated as a payment of tax, the deposit
will stop additional interest from accruing under section 6233(a) on
the imputed underpayment. In addition, interest will be allowed and
paid in accordance with section 6611. The Treasury Department and the
IRS request comments on when interest under section 6611 should begin
to run in this context.
In response to Notice 2016-23, 2016-13 I.R.B. 490 (March 28, 2016),
which requested comments on the new centralized audit regime, one
commenter requested that the IRS clarify that only a dismissal on the
merits and with prejudice be considered a dismissal within the meaning
of section 6234(e). This comment was not adopted. Section 6234
explicitly provides that any decision of the court dismissing the
action ``shall be considered as [the court's] decision that the [FPA]
is correct.'' The only exception provided in section 6234 is in the
case of a dismissal by reason of the rescission of an FPA under section
6231(c). See also JCS-1-16, at 75 (stating that ``a decision to dismiss
the proceeding (other than a dismissal because the [FPA] was rescinded
under section 6231(c)), is a judgment on the merits upholding the final
partnership adjustments''). Accordingly, proposed Sec. 301.6234-1(e)
reflects the language in section 6234(e) without the limitation
suggested in the comment.
9. Period of Limitations on Making Adjustments
Proposed Sec. 301.6235-1 reflects the rules in section 6235
regarding the period within which the IRS must mail an FPA to make a
partnership adjustment for a partnership taxable year. Under these
rules, an FPA generally must be mailed before the later of: (1) Three
years from the later of the date the partnership return is filed or
due, or the date an AAR with respect to the year is filed (see proposed
Sec. 301.6235-1(a)(1)); (2) 270 days after the date everything
required for a modification is submitted plus any extension of time
granted by the IRS with respect to a request for modification under
section 6225(c)(7) (see proposed Sec. 301.6235-1(b)); or (3) 330 days
after the date of the NOPPA plus any extension of time granted by the
IRS with respect to a request for modification under section 6225(c)(7)
(see proposed Sec. 301.6235-1(c)). The 3-year period described under
proposed Sec. 301.6235-1(a)(1) (plus any extensions of the period
under proposed Sec. 301.6235-1(d) and taking into account any special
rules under section 6235(c)) is also the time period within which the
[[Page 60154]]
IRS must mail a NOPPA. See proposed Sec. 301.6231-1(b)(1).
The proposed regulations do not currently incorporate any rules
outside of subchapter C of chapter 63 of the Code that might extend
this period. As discussed in the Explanation of Provisions section of
this preamble and in the November 30 NPRM, if the AAR process can be
used to coordinate sections 905(c) and the adjustment rules under the
centralized partnership audit regime, the proposed regulations may need
to be modified to account for redeterminations under section 905(c).
The Treasury Department and the IRS request comments on whether
additional guidance would be helpful with respect to any other specific
provision, outside of subchapter C of chapter 63 of the Code, which
might extend the adjustment period under the centralized partnership
audit regime.
Once a NOPPA is mailed, proposed Sec. 301.6235-1(c) provides that
the IRS will have at least 330 days from the date of the NOPPA to make
a partnership adjustment regardless of whether the partnership requests
modification of the imputed underpayment.
If the partnership requests modification of an imputed
underpayment, proposed Sec. 301.6235-1(b) provides that the IRS will
have at least 270 days from the date on which everything required to be
submitted pursuant to section 6225(c) is so submitted to the IRS to
make a partnership adjustment. Proposed Sec. 301.6235-1(b)(2) provides
that, for purposes of section 6235(a)(2), the date on which everything
required to be submitted pursuant to section 6225(c) is so submitted to
the IRS is the earlier of: (1) The date on which the time for
submitting the modification request and information (as described in
proposed Sec. 301.6225-2(c)(3)(i) (June 14 NPRM)) ends (including
extensions); or (2) the date on which the partnership and the IRS agree
to waive the 270-day period under proposed Sec. 301.6231-1(b)(2)(ii)
(June 14 NPRM) before an FPA can be mailed. Therefore, once a NOPPA has
been mailed, the IRS will have 330 days from the date the NOPPA is
mailed to make a partnership adjustment and in general may have up to
540 days (270 days in the modification period and 270 days from the end
of the modification period) from the date the NOPPA is mailed if there
are no extensions or waivers executed by the taxpayer.
Proposed Sec. 301.6235-1(d) provides that any of the periods
described in proposed Sec. 301.6235-1(a), (b), and (c) may be extended
by an agreement, in writing, entered into by the partnership and the
IRS before the expiration of such period. A partnership and the IRS may
also agree to extend a period of time that has already been extended
under proposed Sec. 301.6235-1(d).
Special Analyses
Certain IRS regulations, including this one, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory impact assessment is
not required. Because the proposed regulations would not impose a
collection of information on small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices and other guidance
cited in this preamble are published in the Internal Revenue Bulletin
(or Cumulative Bulletin) and are available from the Superintendent of
Documents, U.S. Government Publishing Office, Washington, DC 20402, or
by visiting the IRS website at www.irs.gov.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic and written comments that
are submitted timely to the IRS as prescribed in this preamble under
the ADDRESSES heading. The Treasury Department and the IRS request
comments on all aspects of the proposed rules. All comments will be
available at www.regulations.gov or upon request. A public hearing will
be scheduled if requested in writing by any person that timely submits
written comments. If a public hearing is scheduled, then notice of the
date, time, and place for the public hearing will be published in the
Federal Register.
Drafting Information
The principal authors of these proposed regulations are Jennifer M.
Black, Joy E. Gerdy-Zogby, Brittany Harrison, and Steven L. Karon of
the Office of the Associate Chief Counsel (Procedure and
Administration). However, other personnel from the Treasury Department
and the IRS participated in their development.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 301 is proposed to be amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
0
Paragraph 1. The authority citation for part 301 continues to be read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 301.6221(a)-1 [Amended]
0
Par. 2. Section 301.6221(a)-1, as proposed to be amended at 82 FR 27334
(June 14, 2017), is further amended by removing and reserving paragraph
(c).
0
Par. 3. Section 301.6225-2, as proposed to be amended at 82 FR 27334
(June 14, 2017), is further amended by adding paragraph (d)(2)(viii) to
read as follows:
Sec. 301.6225-2 Modification of imputed underpayment.
* * * * *
(d) * * *
(2) * * *
(viii) Penalties. The applicability of any penalties, additions to
tax, or additional amounts that relate to a partnership adjustment is
determined at the partnership level in accordance with section 6221(a).
However, the amount of penalties, additions to tax, and additional
amounts a reviewed year partner (or indirect partner) must pay under
paragraph (d)(2)(ii) of this section for the first affected year (as
defined in Sec. 301.6226-3(b)(2)) and for any modification year (as
described in paragraph (d)(2)(iv) of this section) is based on the
underpayment or understatement of tax, if any, that results from taking
into account the adjustments in the first affected year or the
modification year, as applicable. For instance, if after taking into
account the adjustments, the partner would not have an underpayment, or
has an understatement that falls below the applicable threshold for the
imposition of a penalty, in the first affected year or any modification
year, no penalty would be due from that partner for such year. A
partner's claim that there is reasonable cause under section 6664(c)
(or other partner-level defense as described in Sec. 301.6226-3(i)(3))
for an underpayment or understatement described in this paragraph
(d)(2)(viii) may be submitted with an amended
[[Page 60155]]
return filed under paragraph (d)(2) of this section, but only if the
partner pays all tax, penalties, and interest due in accordance with
paragraph (d)(2)(ii) of this section.
* * * * *
0
Par. 4. Section 301.6226-1, as proposed to be amended at 82 FR 27334
(June 14, 2017), is further amended by revising paragraph (d) to read
as follows:
Sec. 301.6226-1 Election for an alternative to the payment of the
imputed underpayment.
* * * * *
(d) Binding nature of statements. The election under this section,
which includes filing and furnishing statements described in Sec.
301.6226-2, are actions of the partnership under section 6223 and the
regulations thereunder and, unless determined otherwise by the IRS, the
partner's share of the adjustments and the applicability of any
penalties, additions to tax, and additional amounts as set forth in the
statement are binding on the partner pursuant to section 6223.
Accordingly, a partner may not treat items reflected on a statement
described in Sec. 301.6226-2 on the partner's return inconsistently
with how those items are treated on the statement that is filed with
the IRS. See Sec. 301.6222-1(c)(2) (regarding items the treatment of
which a partner is bound to under section 6223).
* * * * *
0
Par. 5. Section 301.6226-2, as proposed to be amended at 82 FR 27334
(June 14, 2017), is further amended by:
0
a. Revising paragraphs (e)(5) and (7).
0
b. Removing and reserving paragraph (e)(8).
0
c. Revising paragraph (f)(2).
0
d. Removing paragraph (f)(3).
0
e. Removing and reserving paragraph (g).
The revisions read as follows:
Sec. 301.6226-2 Statements furnished to partners and filed with the
IRS.
* * * * *
(e) * * *
(5) Modifications approved by the IRS with respect to the reviewed
year partner (or with respect to any indirect partner (as defined in
Sec. 301.6241-1(a)(4)) that holds its interest in the partnership
through its interest in the reviewed year partner);
* * * * *
(7) The applicability of any penalty, addition to tax, or
additional amount determined at the partnership level that relates to
any adjustments allocable to the reviewed year partner and the
adjustments to which the penalty, addition to tax, or additional amount
relates, the section of the Internal Revenue Code under which each
penalty, addition to tax, or additional amount is imposed, and the
applicable rate of each penalty, addition to tax, or additional amount
determined at the partnership level;
* * * * *
(f) * * *
(2) Treatment of modifications disregarded. Any modifications
approved by the IRS with respect to the reviewed year partner (or with
respect to any indirect partner (as defined in Sec. 301.6241-1(a)(4))
that holds its interest in the partnership through its interest in the
reviewed year partner) under Sec. 301.6225-2 are disregarded for
purposes of determining each partner's share of the adjustments under
paragraph (f)(1) of this section.
* * * * *
0
Par. 6. Section 301.6226-3, as proposed to be amended at 82 FR 27334
(June 14, 2017), is further amended by:
0
a. Revising paragraphs (a) and (b)(4).
0
b. Removing and reserving paragraphs (c) and (d)(2).
0
c. Revising paragraphs (d)(3), (e), and (g).
0
d. Adding paragraphs (i) and (j).
The revisions and additions read as follows:
Sec. 301.6226-3 Adjustments Taken Into Account by Partners.
(a) Tax imposed by chapter 1 increased by additional reporting year
tax. The tax imposed by chapter 1 of subtitle A of the Internal Revenue
Code (chapter 1 tax) for each reviewed year partner (as defined in
Sec. 301.6241-1(a)(9)) for the taxable year that includes the date a
statement was furnished in accordance with Sec. 301.6226-2 (the
reporting year) is increased by the additional reporting year tax. The
additional reporting year tax is the aggregate of the adjustment
amounts (determined in accordance with paragraph (b) of this section).
In addition to being liable for the additional reporting year tax, a
reviewed year partner must also calculate and pay for the reporting
year any penalties, additions to tax, and additional amounts (as
determined under paragraph (i) of this section). Finally, a reviewed
year partner must also calculate and pay for the reporting year any
interest (as determined under paragraph (d) of this section).
(b) * * *
(4) Coordination of sections 860 and 6226. If a qualified
investment entity (QIE) within the meaning of section 860(b) receives a
statement described in Sec. 301.6226-2(a) and correctly makes a
determination within the meaning of section 860(e)(4) that one or more
of the adjustments reflected in the statement is an adjustment within
the meaning of section 860(d) with respect to that QIE for a taxable
year, the QIE may distribute deficiency dividends within the meaning of
section 860(f) for that taxable year and avail itself of the deficiency
dividend procedures set forth in section 860. If the QIE utilizes the
deficiency dividend procedures with respect to adjustments in a
statement described in Sec. 301.6226-2(a), the QIE may claim a
deduction for deficiency dividends against the adjustments furnished to
the QIE in the statement in calculating any correction amounts under
paragraphs (b)(2) and (3) of this section, and interest on such
correction amounts under paragraph (d) of this section, to the extent
that the QIE makes deficiency dividend distributions under section
860(f) and complies with all requirements of section 860 and the
regulations thereunder.
* * * * *
(d) * * *
(3) Interest on penalties. Interest on any penalties, additions to
tax, or additional amounts determined under paragraph (i) of this
section is calculated at the rate set forth in paragraph (d)(4) of this
section from the due date (without extension) of the reviewed year
partner's return for the first affected year (as defined in paragraph
(b)(2) of this section) until the amount is paid.
* * * * *
(e) Pass-through partners--(1) In general. Expect as provided in
paragraph (e)(6) of this section, if a pass-through partner (as defined
in Sec. 301.6241-1(a)(5)) is furnished a statement described in Sec.
301.6226-2 (including a statement described in paragraph (e)(3)(i) of
this section) with respect to adjustments of a partnership that made an
election under Sec. 301.6226-1, the pass-through partner must take
into account the adjustments reflected on that statement in accordance
with either paragraph (e)(3) or (4) of this section.
(2) Failure to take into account adjustments. If any pass-through
partner fails to take into account the adjustments reflected on a
statement described in Sec. 301.6226-2 in accordance with paragraph
(e)(3), (4), or (6) of this section, the pass-through partner must pay
an amount that is calculated like an imputed underpayment, as well as
any penalties, additions to tax, additional amounts, and interest with
respect to such adjustments as described under paragraph (e)(4) of this
section.
(3) Furnishing statements to partners--(i) In general. A pass-
through partner described in paragraph (e)(1) of
[[Page 60156]]
this section takes into account the adjustments under paragraph (e)(3)
of this section by furnishing a statement that includes the items
required by paragraph (e)(3)(iii) of this section to the partners that
held an interest in the pass-through partner at any time during the
taxable year of the pass-through partner to which the adjustments in
the statement furnished to the pass-through partner relate (affected
partner). The statements described in this paragraph (e)(3)(i) must be
filed with the IRS, along with a transmittal that includes a summary of
all statements filed under this paragraph (e)(3)(i), and such other
information as required in forms, instructions, and other guidance, by
the due date prescribed in paragraph (e)(3)(ii) of this section. Except
as otherwise provided in paragraphs (e)(3)(ii), (iii), and (v) of this
section, the rules applicable to statements described in Sec.
301.6226-2 are applicable to statements described in this paragraph
(e)(3)(i).
(ii) Time for filing and furnishing the statements. The pass-
through partner must file with the IRS and furnish to its affected
partners the statements described in paragraph (e)(3)(i) of this
section no later than the extended due date for the return for the
adjustment year (as defined in Sec. 301.6241-1(a)(1)) of the
partnership that made the election under Sec. 301.6226-1. For purposes
of the preceding sentence, the extended due date is the extended due
date under section 6081 regardless of whether the partnership that made
the election under Sec. 301.6226-1 is required to file a return for
the adjustment year or timely files a request for an extension under
section 6081 and the regulations thereunder.
(iii) Contents of statements. Each statement described in paragraph
(e)(3)(i) of this section must include the following information--
(A) The name and correct taxpayer identification number (TIN) of
the partnership that made the election under Sec. 301.6226-1 with
respect to the adjustments reflected on the statements described in
paragraph (e)(3)(i) of this section;
(B) The adjustment year of the partnership described in paragraph
(e)(3)(iii)(A) of this section;
(C) The extended due date for the return for the adjustment year of
the partnership described in paragraph (e)(3)(iii)(A) of this section
(as described in paragraph (e)(3)(ii) of this section);
(D) The date on which the partnership described in paragraph
(e)(3)(iii)(A) of this section furnished its statements required under
Sec. 301.6226-2(b);
(E) The name and correct TIN of the partnership that furnished the
statement to the pass-through partner if different from the partnership
described in paragraph (e)(3)(iii)(A) of this section;
(F) The name and correct TIN of the pass-through partner;
(G) The pass-through partner's taxable year to which the
adjustments reflected on the statements described in paragraph
(e)(3)(i) of this section relates;
(H) The name and correct TIN of the affected partner to whom the
statement is being furnished;
(I) The current or last address of the affected partner that is
known to the pass-through partner;
(J) The affected partner's share of items as originally reported to
such partner under section 6031(b) and, if applicable, section 6227,
for the taxable year to which the adjustments reflected on the
statement furnished to the pass-through partner relate;
(K) The affected partner's share of partnership adjustments
determined under Sec. 301.6226-2(f)(1) as if the affected partner were
the reviewed year partner and the partnership were the pass-through
partner;
(L) Modifications approved by the IRS with respect to the affected
partner or an indirect partner (as defined in Sec. 301.6241-1(a)(4))
that holds its interest in the partnership that made the election under
Sec. 301.6226-1 through the affected partner;
(M) The affected partner's share of any amounts attributable to
adjustments to tax attributes (as defined in Sec. 301.6241-1(a)(10))
for any intervening year (as defined in paragraph (b)(3) of this
section) resulting from the adjustments in the reviewed year with
respect to the partnership described in paragraph (e)(3)(iii)(A) of
this section;
(N) The applicability of any penalties, additions to tax, or
additional amounts that relate to any adjustments allocable to the
affected partner (as determined under Sec. 301.6226-2(f)(3)) and the
adjustments allocated to the affected partner to which such penalties,
additions to tax, or additional amounts relate, the section of the
Internal Revenue Code under which each penalty, addition to tax, or
additional amount is imposed, and the applicable rate of each penalty,
addition to tax, or additional amount; and
(O) Any other information required by forms, instructions, and
other guidance prescribed by the IRS.
(iv) Affected partner must take into account the adjustments. A
statement furnished to an affected partner in accordance with paragraph
(e)(3) of this section is treated as if it were a statement described
in Sec. 301.6226-2. An affected partner that is a pass-through partner
must take into account its share of the adjustments reflected on such a
statement in accordance with paragraph (e) of this section. An affected
partner that is not a pass-through partner must take into account its
share of the adjustments reflected on such a statement in accordance
with this section by treating references to ``reviewed year partner''
as ``affected partner''. For purposes of this paragraph (e)(3)(iv), an
affected partner that is not a pass-through partner takes into account
the adjustments in accordance with this section by determining its
reporting year based on the date upon which the partnership that made
the election under Sec. 301.6226-1 furnished its statements to its
reviewed year partners (as described in paragraph (a) of this section).
No addition to tax under section 6651 related to any additional
reporting year tax will be imposed if an affected partner that is not a
pass-through partner reports and pays the additional reporting year tax
within 30 days of the extended due date for the return for the
adjustment year of the partnership that made the election under Sec.
301.6226-1 (as described in paragraph (e)(3)(ii) of this section).
(v) Adjustments subject to chapters 3 and 4 of the Internal Revenue
Code. If a pass-through partner furnishes statements to its affected
partners in accordance with paragraph (e)(3) of this section, the pass-
through partner must comply with the requirements of Sec. 301.6226-
2(h)(3), and an affected partner must comply with the requirements of
paragraph (f) of this section. For purposes of applying both Sec.
301.6226-2(h)(3) and paragraph (f) of this section, as appropriate,
references to the ``partnership'' should be replaced with references to
the ``pass-through partner''; references to the ``reviewed year
partner'' should be replaced with references to the ``affected
partner''; references to the statement required under paragraph (a) of
this section and its due date should be replaced with references to the
statement required under paragraph (e)(3)(i) of this section and its
due date described in paragraph (e)(3)(ii) of this section; and
references to the ``reporting year'' should be read in accordance with
paragraph (e)(3)(iv) of this section.
(4) Pass-through partner makes a payment--(i) In general. A pass-
through partner that is furnished a statement described in Sec.
301.6226-2 takes into account the adjustments reflected on that
statement under paragraph (e)(4) of this section when the pass-through
partner--
[[Page 60157]]
(A) Pays an amount computed under paragraph (e)(4)(iii) of this
section;
(B) Pays any penalties, additions to tax, and additional amounts
and interest computed under paragraph (e)(4)(iv) of this section; and
(C) Provides the IRS with information related to such payment as
required by forms, instructions, and other guidance.
(ii) Time of payment. A pass-through partner must report and pay
the amounts described in paragraphs (e)(4)(i)(A) and (B) of this
section in accordance with forms, instructions, and other guidance no
later than the extended due date for the return for the adjustment year
of the partnership that made the election under Sec. 301.6226-1. For
purposes of the preceding sentence, the extended due date is the
extended due date under section 6081 regardless of whether the
partnership that made the election under Sec. 301.6226-1 is required
to file a return for the adjustment year or timely filed a request for
an extension under section 6081 and the regulations thereunder.
(iii) Computation of payment amount. The payment required under
paragraph (e)(4)(i)(A) of this section is computed in the same manner
as an imputed underpayment is calculated under section 6225 and Sec.
301.6225-1 by treating the adjustments reflected on the statement
furnished to the pass-through partner under Sec. 301.6226-2 as
partnership adjustments (as defined in Sec. 301.6241-1(a)(6)) for the
first affected year. Separate calculations must also be made for each
intervening year by treating the pass-through partner's share of
partnership tax attributes for each intervening year as partnership
adjustments for that intervening year. The sum of the amounts
calculated for the first affected year and each intervening year under
this paragraph (e)(4)(iii) is the payment required under paragraph
(e)(4)(i)(A) of this section. Any modification approved by the IRS
under Sec. 301.6225-2 with respect to the pass-through partner
(including any modifications with respect to an indirect partner that
holds its interest in the partnership that made the election under
Sec. 301.6226-1 through its interest in the pass-through partner)
reflected on the statement furnished to the pass-through partner under
Sec. 301.6226-2 (or paragraph (e)(3) of this section) is taken into
account in calculating the amounts under this paragraph (e)(4)(iii).
(iv) Penalties and interest--(A) Penalties. A pass-through partner
must compute and pay any applicable penalties, additions to tax, and
additional amounts on the amounts calculated under paragraph
(e)(4)(iii) of this section as if such amounts were actual imputed
underpayments for the pass-through partner's first affected year or any
intervening year, as applicable. See Sec. 301.6233-1(c).
(B) Interest. A pass-through partner must pay interest on the
amounts calculated under paragraph (e)(4)(iii) of this section in
accordance with paragraph (d) of this section as if such amounts were
amounts due for the first affected year or any intervening year, as
applicable.
(v) Adjustments that do not result in an imputed underpayment.
Adjustments taken into account under paragraph (e)(4) of this section
that would not result in an imputed underpayment (as defined in Sec.
301.6225-1(c)(2)) if the amounts calculated under paragraph (e)(4)(iii)
of this section were actual imputed underpayments are taken into
account by the pass-through partner in accordance with Sec. 301.6225-3
in the taxable year of the pass-through partner that includes the date
the payment required under paragraph (e)(4)(i)(A) of this section is
made or, if no payment is required under paragraph (e)(4)(i)(A) of this
section, the date the statement described in Sec. 301.6226-2 (or
paragraph (e)(3)(i) of this section) is furnished to the pass-through
partner.
(vi) Coordination with chapters 3 and 4 of the Code. If a pass-
through partner pays an amount computed under paragraph (e)(4)(iii) of
this section, Sec. 301.6225-1(a)(4) applies to the pass-through
partner by substituting ``pass-through partner'' for ``partnership''
where Sec. 301.6225-1(a)(4) refers to the partnership that made the
election under Sec. 301.6226-1.
(5) Treatment of pass-through partners that are not partnerships--
(i) S corporations. For purposes of paragraph (e) of this section, an S
corporation is treated as a partnership and its shareholders are
treated as partners.
(ii) Trusts and estates. Except as provided in paragraph (j) of
this section, for purposes of paragraph (e) of this section, a trust
and its beneficiaries, and an estate and its beneficiaries are treated
in the same manner as a partnership and its partners.
(6) Pass-through partners subject to chapter 1 tax. A pass-through
partner that is subject to tax under chapter 1 of the Code for the
first affected year or any intervening year on the adjustments (or a
portion of the adjustments) reflected on the statement furnished to
such partner under Sec. 301.6226-2 (or paragraph (e)(3) of this
section) takes the adjustments into account under this paragraph (e)(6)
when the pass-through partner calculates and pays the additional
reporting year tax as determined under paragraph (b) of this section
and furnishes statements to its partners in accordance with paragraph
(e)(3) of this section. Notwithstanding the prior sentence, a pass-
through partner is only required to include on a statement under
paragraph (e)(3) of this section the adjustments that would be required
to be included on statements furnished to owners or beneficiaries under
sections 6037 and 6034A, as applicable, if the pass-through partner had
correctly reported the items for the year to which the adjustments
relate. If the pass-through partner fails to comply with the
requirements of this paragraph (e)(6), the provisions of paragraph
(e)(2) of this section apply.
* * * * *
(g) Examples. The following examples illustrate the rules of this
section. For purposes of these examples, each partnership is subject to
subchapter C of chapter 63 of the Code, each partnership and partner
has a calendar year taxable year, no modifications are requested by any
partnership under Sec. 301.6225-2 (unless otherwise stated), no
penalties, additions to tax, or additional amounts are determined at
the partnership level (unless otherwise stated), all persons are U.S.
persons (unless otherwise stated), and the highest rate of income tax
in effect for all taxpayers is 40 percent for all relevant periods.
Example 1. On its partnership return for the 2020 tax year,
Partnership reported ordinary income of $1,000 and charitable
contributions of $400. On June 1, 2023, the IRS mails a notice of
final partnership adjustment (FPA) to Partnership for Partnership's
2020 year disallowing the charitable contribution in its entirety
and determining that a 20 percent accuracy-related penalty under
section 6662(b) applies to the disallowance of the charitable
contribution. Partnership makes a timely election under section 6226
in accordance with Sec. 301.6226-1 with respect to the imputed
underpayment in the FPA for Partnership's 2020 year and files a
timely petition in the Tax Court challenging the partnership
adjustments. The Tax Court determines that Partnership is not
entitled to any of the claimed $400 in charitable contributions and
upholds the applicability of the penalty. The decision regarding
Partnership's 2020 tax year becomes final on December 15, 2025.
Pursuant to Sec. 301.6226-2(b), the partnership adjustments are
finally determined on December 15, 2025. On February 2, 2026,
Partnership files the statements described under Sec. 301.6226-2
with the IRS and furnishes to partner A, an individual who was a
partner in Partnership during 2020, a statement described in Sec.
301.6226-2. A had a 25 percent interest in Partnership during all of
2020 and was allocated 25 percent of all items from Partnership for
that year. The statement shows A's share of ordinary income reported
on Partnership's return for the reviewed year
[[Page 60158]]
of $250 and A's share of the charitable contribution reported on
Partnership's return for the reviewed year of $100. The statement
also shows no adjustment to A's share of ordinary income, but does
show an adjustment to A's share of the charitable contribution, a
reduction of $100 resulting in $0 charitable contribution allocated
to A from Partnership for 2020. In addition, the statement reports
that a 20 percent accuracy-related penalty under section 6662(b)
applies. A must pay the additional reporting year tax as determined
in accordance with paragraph (b) of this section, in addition to A's
penalties and interest. A computes his additional reporting year tax
as follows. First, A determines the correction amount for the first
affected year (the 2020 taxable year) by taking into account A's
share of the partnership adjustment (<100> reduction in charitable
contribution) for the 2020 taxable year. A determines the amount by
which his chapter 1 tax for 2020 would have increased if the $100
adjustment to the charitable contribution from Partnership were
taken into account for that year. There is no adjustment to tax
attributes in A's intervening years as a result of the adjustment to
the charitable contribution for 2020. Therefore, A's aggregate of
the adjustment amounts is the correction amount for 2020, A's first
affected year. In addition to the aggregate of the adjustment
amounts being added to the chapter 1 tax that A owes for 2026, the
reporting year, A must calculate a 20 percent accuracy-related
penalty on A's underpayment attributable to the $100 adjustment to
the charitable contribution, as well as interest on the correction
amount for the first affected year and the penalty determined in
accordance with paragraph (d) of this section. Interest on the
correction amount for the first affected tax year runs from April
15, 2021, the due date of A's 2020 return (the first affected tax
year) until A pays this amount. In addition, interest runs on the
penalty from April 15, 2021, the due date of A's 2020 return for the
first affected year until A pays this amount. On his 2026 income tax
return, A must report the additional reporting year tax determined
in accordance with paragraph (b) of this section, which is the
correction amount for 2020, plus the accuracy-related penalty
determined in accordance with paragraph (i) of this section, and
interest determined in accordance with paragraph (d) of this section
on the correction amount for 2020 and the penalty.
Example 2. On its partnership return for the 2020 tax year,
Partnership reported an ordinary loss of $500 million. On June 1,
2023, the IRS mails an FPA to Partnership for the 2020 taxable year
determining that $300 million of the $500 million in ordinary loss
should be recharacterized as a long-term capital loss. Partnership
has no long-term capital gain for its 2020 tax year. The FPA for
Partnership's 2020 tax year reflects an adjustment of an increase in
ordinary income of $300 million (as a result of the disallowance of
the recharacterization of $300 million from ordinary loss to long-
term capital loss) and an imputed underpayment related to that
adjustment, as well as an adjustment of an additional $300 million
in long-term capital loss for 2020 which does not result in an
imputed underpayment pursuant to under Sec. 301.6225-1(c)(2)(ii).
Partnership makes a timely election under section 6226 in accordance
with Sec. 301.6226-1 with respect to the imputed underpayment in
the FPA and does not file a petition for readjustment under section
6234. Accordingly, under Sec. 301.6226-1(b)(2) and Sec. 301.6225-
3(b)(6), the adjustment year partners (as defined in Sec. 301.6241-
1(a)(2)) do not take into account the $300 million long-term capital
loss that does not result in an imputed underpayment. Rather, the
reviewed year partners will take into account the $300 million long-
term capital loss. The time to file a petition expires on August 30,
2023. Pursuant to Sec. 301.6226-2(b), the partnership adjustments
become finally determined on August 30, 2023. On September 30, 2023,
Partnership files with the IRS statements described in Sec.
301.6226-2 and furnishes statements to all of its reviewed year
partners in accordance with Sec. 301.6226-2. One partner of
Partnership in 2020, B (an individual), had a 25 percent interest in
Partnership during all of 2020 and was allocated 25 percent of all
items from Partnership for that year. The statement filed with the
IRS and furnished to B shows B's allocable share of the ordinary
loss reported on Partnership's return for the 2020 taxable year as
$125 million. The statement also shows an adjustment to B's
allocable share of the ordinary loss in the amount of <$75 million>,
resulting in a corrected ordinary loss allocated to B of $50 million
for taxable year 2020 ($125 million originally allocated to B less
$75 million which is B's share of the adjustment to the ordinary
loss). In addition, the statement shows an increase to B's share of
long-term capital loss in the amount of $75 million (B's share of
the adjustment that did not result in the imputed underpayment with
respect to Partnership). B must pay the additional reporting year
tax as determined in accordance with paragraph (b) of this section.
B computes his additional reporting year tax as follows. First, B
determines the correction amount for the first affected year (the
2020 taxable year) by taking into account B's share of the
partnership adjustments (a $75 million reduction in ordinary loss
and an increase of $75 million in long-term capital loss) for the
2020 taxable year. B determines the amount by which his chapter 1
tax for 2020 would have increased if the $75 million adjustment to
ordinary loss and the $75 million adjustment to long-term capital
loss from Partnership were taken into account for that year. Second,
B determines if there is any increase in chapter 1 tax for any
intervening year as a result of the adjustment to the ordinary and
capital losses for 2020. B's aggregate of the adjustment amounts is
the correction amount for 2020, B's first affected year plus any
correction amounts for any intervening years. B is also liable for
any interest on the correction amount for the first affected year
and for any intervening year as determined in accordance with
paragraph (d) of this section.
Example 3. On its partnership return for the 2020 tax year,
Partnership, a domestic partnership, reported U.S. source dividend
income of $2,000. On June 1, 2023, the IRS mails an FPA to
Partnership for Partnership's 2020 year increasing the amount of
U.S. source dividend income to $4,000 and determining that a 20
percent accuracy-related penalty under section 6662(b) applies to
the increase in U.S. source dividend income. Partnership makes a
timely election under section 6226 in accordance with Sec.
301.6226-1 with respect to the imputed underpayment in the FPA for
Partnership's 2020 year and does not file a petition for
readjustment under section 6234. The time to file a petition expires
on August 30, 2023. Pursuant to Sec. 301.6226-2(b), the partnership
adjustments become finally determined on August 30, 2023. On
September 30, 2023, Partnership files the statements described under
Sec. 301.6226-2 with the IRS and furnishes to partner C, a
nonresident alien individual who was a partner in Partnership during
2020 (and remains a partner in Partnership in 2023), a statement
described in Sec. 301.6226-2. C had a 50 percent interest in
Partnership during all of 2020 and was allocated 50 percent of all
items from Partnership for that year. The statement shows C's share
of U.S. source dividend income reported on Partnership's return for
the reviewed year of $1,000 and an adjustment to U.S. source
dividend income of $1,000. In addition, the statement reports that a
20 percent accuracy-related penalty under section 6662(b) applies.
Under Sec. 301.6226-2(h)(3)(i), because the additional $1,000 in
U.S. source dividend income allocated to C is an amount subject to
withholding (as defined in Sec. 301.6226-2(h)(3)(i)), Partnership
must pay the amount of tax required to be withheld on the
adjustment. See Sec. Sec. 1.1441-1(b)(1) and 1.1441-5(b)(2)(i)(A)
of this chapter. Under Sec. 301.6226-2(h)(3)(ii), Partnership may
reduce the amount of withholding tax it must pay because it has
valid documentation from 2020 that establishes that C was entitled
to a reduced rate of withholding in 2020 on U.S. source dividend
income of 10 percent pursuant to a treaty. Partnership withholds
$100 of tax from C's distributive share, remits the tax to the IRS,
and files the necessary return and information returns required by
Sec. 1.1461-1 of this chapter. On his 2023 return, C must report
the additional reporting year tax determined in accordance with
paragraph (b) of this section, the accuracy-related penalty
determined in accordance with paragraph (i) of this section, and
interest determined in accordance with paragraph (d) of this section
on the correction amount for the first affected year, the correction
amount for any intervening year, and the penalty. Under paragraph
(f) of this section, C may claim the $100 withholding tax paid by
Partnership pursuant to Sec. 301.6226-2(h)(3)(i) as a credit under
section 33 against C's income tax liability on his 2023 return.
Example 4. On its partnership return for the 2020 tax year,
Partnership reported ordinary income of $100 million and a long-term
capital gain of $40 million. Partnership had four equal partners
during the 2020 tax year: E, F, G, and H, all of whom were
individuals. On its partnership return for the 2020 tax year, the
entire long-term capital gain was allocated to partner E and the
ordinary income was allocated to all partners based on their equal
(25 percent) interest in
[[Page 60159]]
Partnership. The IRS initiates an administrative proceeding with
respect to Partnership's 2020 taxable year and determines that the
long-term capital gain should have been allocated equally to all
four partners and that Partnership should have recognized an
additional $10 million in ordinary income. On June 1, 2023, the IRS
mails an FPA to Partnership reflecting the reallocation of the $40
million long-term capital gain so that F, G, and H each have $10
million increase in long-term capital gain and E has a $30 million
reduction in long-term capital gain for 2020. In addition, the FPA
reflects the partnership adjustment increasing ordinary income by
$10 million. The FPA reflects a general imputed underpayment with
respect to the increase in ordinary income and a specific imputed
underpayment with respect to the increase in long-term capital gain
allocated to F, G, and H. In addition, the FPA reflects a $30
million partnership adjustment that does not result in an imputed
underpayment, that is, the reduction of $30 million in long-term
capital gain with respect to E. Partnership makes a timely election
under section 6226 in accordance with Sec. 301.6226-1 with respect
to the specific imputed underpayment relating to the reallocation of
long-term capital gain. Partnership does not file a petition for
readjustment under section 6234. The time to file a petition expires
on August 30, 2023. Pursuant to Sec. 301.6226-2(b), the partnership
adjustments become finally determined on August 30, 2023.
Partnership timely pays and reports the general imputed underpayment
relating to the partnership adjustment to ordinary income. On
September 30, 2023, Partnership files with the IRS statements
described in Sec. 301.6226-2 and furnishes statements to its
partners reflecting their share of the partnership adjustments as
finally determined in the FPA that relate to the specific imputed
underpayment, that is, the reallocation of long-term capital gain.
The statements for F, G, and H each reflect a partnership adjustment
of an additional $10 million of long-term capital gain for 2020. The
statement for E reflects a partnership adjustment of a reduction of
$30 million of long-term capital gain for 2020. All partners must
pay the additional reporting year tax as determined in accordance
with paragraph (b) of this section in the partners' reporting year,
which is 2023. They compute their additional reporting year tax as
follows. First, they determine the correction amount for the first
affected year (the 2020 taxable year) by taking into account their
share of the partnership adjustments for the 2020 taxable year. They
each determine the amount by which their chapter 1 tax for 2020
would have increased if the adjustment to long-term capital gain
from Partnership were taken into account for that year. Second, they
determine if there is any increase in chapter 1 tax for any
intervening year as a result of the adjustment to the long-term
capital gain for 2020. Their aggregate of the adjustment amounts is
the correction amount for 2020, their first affected year plus any
correction amounts for any intervening years. They are also liable
for any interest on the correction amount for the first affected
year and for any intervening year as determined in accordance with
paragraph (d) of this section. In accordance with paragraph (b) of
this section, the correction amounts may not be less than zero.
Accordingly, E's additional reporting year tax is zero because E
only has a reduction in capital gain which would not result in an
increase in chapter 1 tax.
Example 5. On its partnership return for the 2020 taxable year,
Partnership reported a long-term capital loss of $5 million. During
an administrative proceeding with respect to Partnership's 2020
taxable year, the IRS mails a notice of proposed partnership
adjustment (NOPPA) in which it proposes to disallow $2 million of
the reported $5 million long-term capital loss. F, a C corporation
partner with a 50 percent interest in Partnership, received 50
percent of all long-term capital losses for 2020. As part of the
modification process described in Sec. 301.6225-2(d)(2), F files an
amended return for 2020 taking into account F's share of the
partnership adjustment ($1 million reduction in long-term capital
loss) and pays the tax owed for 2020, including interest. Also as
part of the modification process, F also files amended returns for
2021 and 2022 and paid additional tax (and interest) for these years
because the reduction in long-term capital loss for 2020 affected
the tax due from F for 2021 and 2022. See Sec. 301.6225-
2(d)(2)(iv). The reduction of the long-term capital loss in 2020 did
not affect any other taxable year of F. The IRS approves the
modification with respect to F and on June 1, 2023, mails an FPA to
Partnership for Partnership's 2020 year reflecting the partnership
adjustment reducing the long-term capital loss in the amount of $2
million. The FPA also reflects the modification to the imputed
underpayment based on the amended returns filed by F taking into
account F's share of the reduction in the long-term capital loss.
Partnership makes a timely election under section 6226 in accordance
with Sec. 301.6226-1 with respect to the imputed underpayment in
the FPA for Partnership's 2020 year and files a timely petition in
the Tax Court challenging the partnership adjustments. The Tax Court
upholds the determinations in the FPA and the decision regarding
Partnership's 2020 tax year becomes final on December 15, 2025.
Pursuant to Sec. 301.6226-2(b), the partnership adjustments are
finally determined on December 15, 2025. On February 1, 2026,
Partnership files the statements described under Sec. 301.6226-2
with the IRS and furnishes to its partners statements reflecting
their shares of the partnership adjustment. The statement issued to
F reflects F's share of the partnership adjustment for Partnership's
2020 taxable year as finally determined by the Tax Court. The
statement shows F's share of the long-term capital loss adjustment
for the reviewed year of $1 million and the $1 million reduction in
long-term capital losses taken into account by F as part of the
amended return modification. Accordingly, in accordance with
paragraph (b) of this section, when F computes its correction
amounts for the first affected year (the 2020 taxable year) and the
intervening years (the 2021 through 2026 taxable years), F computes
any additional chapter 1 tax for those years using the returns for
the 2020, 2021, and 2022 taxable years as amended during the
modification process.
Example 6. Partnership has two equal partners for the 2020 tax
year: I (an individual) and J (a partnership). For the 2020 tax
year, J has two equal partners--K and L--both individuals. On June
1, 2023, the IRS mails a notice of final partnership adjustment
(FPA) to Partnership for Partnership's 2020 year increasing
Partnership's ordinary income by $500,000 and asserting an imputed
underpayment of $200,000. Partnership makes a timely election under
section 6226 in accordance with Sec. 301.6226-1 with respect to the
imputed underpayment in the FPA for Partnership's 2020 year and does
not file a petition for readjustment under section 6234. The time to
file a petition expires on August 30, 2023. Pursuant to Sec.
301.6226-1(b), the partnership adjustments become finally determined
on August 30, 2023. Therefore, Partnership's adjustment year is
2023, the due date of the adjustment year return is March 15, 2024,
and if requested, the extended due date for the adjustment year
return is September 16, 2024. On October 12, 2023, Partnership
timely files with the IRS statements described in Sec. 301.6226-2
and timely furnishes statements to its partners reflecting their
share of the partnership adjustments as finally determined in the
FPA. The statements to I and J each reflect a partnership adjustment
of $250,000 of ordinary income. I takes its share of the adjustments
reflected on the statements furnished by Partnership into account on
I's return for the 2023 tax year in accordance with paragraph (b) of
this section. On April 1, 2024, J takes the adjustments into account
under paragraph (e)(3) of this section by timely filing the
information required by that section with the IRS and furnishing
statements to K and L reflecting each partner's share of the
adjustments reflected on the statements Partnership furnished to J.
K and L must take their share of adjustments reflected on the
statements furnished by J into account on their returns for the 2023
tax year in accordance with paragraph (b) of this section by
treating themselves as reviewed year partners for purposes of that
paragraph.
Example 7. On its partnership return for the 2020 tax year,
Partnership reported that it placed Asset, which had a depreciable
basis of $210,000, into service in 2020 and depreciated Asset over 5
years, using the straight-line method. Accordingly, Partnership
claimed depreciation of $42,000 in each year related to Asset.
Partnership has two equal partners for the 2020 tax year: M (a
partnership) and N (an S corporation). For the 2020 tax year, N has
one shareholder, O, who is an individual. On June 1, 2023, the IRS
mails an FPA to Partnership for Partnership's 2020 year. In the FPA,
the IRS determines that Asset should have been depreciated over 7
years instead of 5 years and adjusts the depreciation for the 2020
tax year to $30,000 instead of $42,000 resulting in a $12,000
adjustment. This adjustment results in an imputed underpayment of
$4,800. Partnership makes a timely election under section 6226 in
accordance with Sec. 301.6226-1 with respect to the imputed
underpayment in the FPA for Partnership's 2020 year and does not
file a petition for readjustment under section 6234. The time to
[[Page 60160]]
file a petition expires on August 30, 2023. Pursuant to Sec.
301.6226-1(b), the partnership adjustments become finally determined
on August 30, 2023. On October 12, 2023, Partnership timely files
with the IRS statements described in Sec. 301.6226-2 and furnishes
statements to its partners reflecting their share of the partnership
adjustments as finally determined in the FPA. The statements to M
and N reflect a partnership adjustment of $6,000 of ordinary income
for the 2020 tax year as well as a $6,000 increase in ordinary
income for each of the 2021 and 2022 tax years relating to the
change to the depreciable life of Asset. On February 1, 2024, N
takes the adjustments into account under paragraph (e)(3) of this
section by issuing a statement to O reflecting her share of the
adjustments reported to N on the statement it received from
Partnership. Although not due until September 15, 2024 (the extended
due date of the adjustment year return of Partnership), on March 22,
2024, M takes the adjustments into account under paragraph (e)(4) of
this section by paying an amount calculated like an imputed
underpayment equal to $7,200 (($6,000 for 2020 + $6,000 for 2021 +
$6,000 for 2022) x 40 percent) on the adjustments reflected on the
statement it received from Partnership including M's share of the
partnership tax attributes plus interest on the amount calculated in
accordance with paragraph (e)(4)(iv)(B) of this section. On her 2023
return, O takes the adjustments into account under this section.
Therefore, O reports and pays the additional reporting year tax
determined in accordance with paragraph (b) of this section, which
is the correction amount for 2020 plus the correction amount for
2021 (related to the adjustment to tax attributes) plus the
correction amount for 2022 (related to the adjustment to tax
attributes), and pays interest determined in accordance with
paragraph (d) of this section on the correction amounts for each of
those years.
Example 8. On its partnership return for the 2020 tax year,
Partnership reported $1 million of ordinary loss. Partnership has
two equal partners for the 2020 tax year: P and Q, both S
corporations. For the 2020 tax year, P had one shareholder, R, an
individual. For the 2020 tax year, Q had two shareholders, S and T,
both individuals. On June 1, 2023, the IRS mails a notice of final
partnership adjustment (FPA) to Partnership for Partnership's 2020
year determining $500,000 of the $1 million of ordinary loss should
be recharacterized as $500,000 of long-term capital loss and
$500,000 of the ordinary loss should be disallowed. The FPA asserts
an imputed underpayment of $400,000 ($1 million x 40 percent) on the
$1 million reduction to ordinary loss and reflecting an adjustment
that does not result in an imputed underpayment of a $500,000
capital loss. Partnership makes a timely election under section 6226
in accordance with Sec. 301.6226-1 with respect to the imputed
underpayment in the FPA for Partnership's 2020 year and does not
file a petition for readjustment under section 6234. The time to
file a petition expires on August 30, 2023. Pursuant to Sec.
301.6226-1(b), the partnership adjustments become finally determined
on August 30, 2023. On October 12, 2023, Partnership timely files
with the IRS statements described in Sec. 301.6226-2 and furnishes
statements to its partners reflecting their share of the partnership
adjustments as finally determined in the FPA. The statements to P
and Q each reflect a partnership adjustment of $500,000 increase in
ordinary income and an increase in capital loss of $250,000 in
accordance with Sec. 301.6225-3(b)(6). P takes the adjustments into
account under paragraph (e)(3) of this section by timely furnishing
a statement to R. Q takes the adjustments into account under
paragraph (e)(4) of this section by paying an amount calculated like
an imputed underpayment under paragraph (e)(4)(iii) of this section,
as well as interest determined under paragraph (e)(4)(iv)(B) of this
section on the amount. After applying the rules set forth in Sec.
301.6225-1 regarding the netting and grouping of adjustments, Q
calculates an amount of $200,000 which is equal to the residual
grouping of $500,000 multiplied by 40 percent. The residual grouping
contains the $500,000 attributable to the adjustment to ordinary
income. Q also has one adjustment that does not result in an imputed
underpayment--the $250,000 increase to capital loss. On its 2023
return, Q reports and allocates the $250,000 capital loss to its
shareholders for its 2023 taxable year as a capital loss as provided
in Sec. 301.6225-3. Q must report and pay the amounts due under
paragraph (e)(4) of section no later than September 15, 2024, the
extended due date of Partnership's return for the 2023 year, which
is the adjustment year.
Example 9. On its partnership return for the 2020 tax year,
Partnership reported a $1 million long-term capital gain on the sale
of Stock. Partnership has two equal partners for the 2020 tax year:
U (an individual) and V (a partnership). For the 2020 tax year, V
has two equal partners: W (an individual) and X (a partnership). For
the 2020 tax year, X has two equal partners: Y and Z, both of which
are C corporations. On June 1, 2023, the IRS mails a NOPPA to
Partnership for Partnership's 2020 year proposing a $500,000
increase in the long-term capital gain from the sale of Stock and an
imputed underpayment of $200,000 ($500,000 x 40 percent). On July
17, 2023, Partnership timely submits a request to modify the rate
used in calculating the imputed underpayment under Sec. 301.6225-
2(d)(4). Partnership submits sufficient information demonstrating
that $375,000 of the $500,000 adjustment is allocable to individuals
(50 percent of the $500,000 adjustment allocable to U and 25 percent
of the $500,000 adjustment allocable to W) and the remaining
$125,000 is allocable to C corporations (the indirect partners Y and
Z). The IRS approves the modification and the imputed underpayment
is reduced to $118,750 (($375,000 x 20 percent) + ($125,000 x 35
percent)). See Sec. 301.6225-2(b)(3). On February 28, 2024, the IRS
mails an FPA to Partnership for Partnership's 2020 year determining
a $500,000 increase in the long-term capital gain on the sale of
Stock and asserting an imputed underpayment of $118,750 after the
approved modifications. Partnership makes a timely election under
section 6226 in accordance with Sec. 301.6226-1 with respect to the
imputed underpayment in the FPA for Partnership's 2020 year and does
not file a petition for readjustment under section 6234. The time to
file a petition expires on May 28, 2024. Pursuant to Sec. 301.6226-
1(b), the partnership adjustments become finally determined on May
28, 2024. On July 26, 2024, Partnership timely files with the IRS
statements described in Sec. 301.6226-2 and furnishes statements to
its partners reflecting their share of the partnership adjustments
as finally determined in the FPA. The statements to U and V each
reflect a partnership adjustment of a $250,000 increase in long-term
capital gain. V takes the adjustments into account under paragraph
(e)(4) of this section by paying an amount calculated like an
imputed underpayment under paragraph (e)(4)(iii) of this section, as
well as interest determined under paragraph (e)(4)(iv)(B) of this
section on the amount. On February 3, 2025, V takes the adjustments
into account under paragraph (e)(4) of this section by paying an
amount equal to $68,750 (($125,000 x 35 percent for the adjustments
allocable to X) + ($125,000 x 20 percent for the adjustments
allocable to W)) which includes the rate modifications approved by
the IRS with respect to Y and Z. V must also pay any interest on the
amount as determined in accordance with paragraph (e)(4)(iv)(B) of
this section. V must report and pay the amounts due under paragraph
(e)(4) of this section no later than September 15, 2025, the
extended due date of Partnership's return for the 2024 year, which
is the adjustment year.
* * * * *
(i) Penalties--(1) In general. In the case of a partnership that
makes an election under section 6226, the applicability of penalties,
additions to tax, and additional amounts that relate to a partnership
adjustment are determined at the partnership level in accordance with
section 6221(a). The partnership's reviewed year partners are liable
for such penalties, additions to tax, and additional amounts as
determined under paragraph (i)(2) of this section.
(2) Determining the amount of each reviewed year partner's
penalties. To determine a reviewed year partner's penalties, additions
to tax, and additional amounts for the reporting year, each reviewed
year partner computes the penalty, addition to tax, or additional
amount imposed with respect to the correction amount (or portion
thereof) calculated under paragraph (b) of this section for the first
affected year or intervening year, as applicable. The reviewed year
partner calculates the penalty, addition to tax, or additional amount
as if the correction amount were an underpayment or understatement for
the first affected year or intervening year, as applicable. If after
taking into account the adjustments in accordance
[[Page 60161]]
with this section, the reviewed year partner would not have an
underpayment, or has an understatement that falls below the applicable
threshold for the imposition of a penalty, no penalty would be due from
that reviewed year partner for the reporting year under this paragraph
(i)(2). For penalties in the case of a pass-through partner that makes
a payment under paragraph (e)(4) of this section, see paragraph
(e)(4)(iv) of this section.
(3) Partner-level defenses to penalties. A partner claiming that a
penalty, addition to tax, or additional amount that relates to an
adjustment reflected on a statement described in Sec. 301.6226-2 (or
paragraph (e)(3)(i) of this section) would not be due because of a
partner-level defense must first pay the penalty and file a claim for
refund. Partner-level defenses are limited to those that are personal
to the partner (for example, a reasonable cause and good faith defense
under section 6664(c) that is based on the facts and circumstances
applicable to the partner).
(j) Treatment of disregarded entities and wholly-owned trusts. In
the case of a reviewed year partner that is an entity described in
Sec. 301.7701-2(c)(2)(i) or a trust that is wholly owned by only one
person, whether the grantor or another person, and where the trust
reports the owner's information to payors under Sec. 1.671-
4(b)(2)(i)(A) of this chapter and that is furnished a statement
described in Sec. 301.6226-2 (or paragraph (e)(3)(i) of this section),
the owner of the disregarded entity or wholly-owned trust must take
into account the adjustments reflected on that statement in accordance
with this section as if the owner were the reviewed year partner.
0
Par. 7. Section 301.6227-3, as proposed to be amended at 82 FR 27334
(June 14, 2017), is further amended by revising paragraphs (b)(1) and
(c) to read as follows:
Sec. 301.6227-3 Adjustments requested in an administrative
adjustment request taken into account by reviewed year partners.
* * * * *
(b) * * *
(1) In general. A reviewed year partner that is furnished a
statement described in paragraph (a) of this section must treat the
statement as if it were issued under section 6226(a)(2) and, on or
before the due date for the reporting year must pay the additional
reporting year tax (as defined in Sec. 301.6226-3(a)), if any,
determined after taking into account that partner's share of the
adjustments requested in the AAR in accordance with Sec. 301.6226-3.
For purposes of paragraph (b) of this section, the rule under Sec.
301.6226-3(d)(4) (regarding the increased rate of interest) does not
apply and the last sentence in Sec. 301.6226-3(b)(1) (regarding the
prohibition on correction amounts being less than zero) is disregarded.
Nothing in this section entitles any partner to a refund of tax imposed
by chapter 1 of subtitle A of the Internal Revenue Code (chapter 1 tax)
to which such partner is not entitled. For instance, a partnership-
partner (as defined in Sec. 301.6241-1(a)(7)) may not claim a refund
with respect to its share of any adjustment.
* * * * *
(c) Reviewed year partners that are pass-through partners--(1) In
general. Except as provided in paragraphs (c)(2) and (3) of this
section, if a statement described in paragraph (a) of this section
(including a statement described in this paragraph (c)(1)) is furnished
to a pass-through partner (as defined in Sec. 301.6241-1(a)(5)), the
pass-through partner must take into account the adjustments reflected
on that statement in accordance with Sec. 301.6226-3(e) by treating
the partnership that filed the AAR as the partnership that made an
election under Sec. 301.6226-1. For purposes of this paragraph (c)(1),
the statement furnished to the pass-through partner by the partnership
filing the AAR is treated as if it were a statement issued under
section 6226(a)(2) and described in Sec. 301.6226-2.
(2) Adjustments that do not result in an imputed underpayment. If
the adjustments requested in an AAR do not result in an imputed
underpayment (as described in Sec. 301.6227-2(d)), Sec. 301.6226-
3(e)(2) does not apply, and the pass-through partner must take into
account the adjustments reflected on the statement described in
paragraph (a) or (c)(1) of this section in accordance with Sec.
301.6226-3(e)(3).
(3) Contents of statements. Each statement described in paragraph
(c)(1) of this section must include the following information--
(i) The name and correct taxpayer identification number (TIN) of
the partnership that filed the AAR with respect to the adjustments
reflected on the statements described in paragraph (c)(1) of this
section;
(ii) The adjustment year of the partnership described in paragraph
(c)(3)(i) of this section;
(iii) The extended due date for the return for the adjustment year
of the partnership described in paragraph (c)(3)(i) of this section (as
described in Sec. 301.6226-3(e)(3)(ii));
(iv) The date on which the partnership described in paragraph
(c)(3)(i) of this section furnished its statements required under Sec.
301.6227-2(d);
(v) The name and correct TIN of the partnership that furnished the
statement to the pass-through partner if different from the partnership
described in paragraph (c)(3)(i) of this section;
(vi) The name and correct TIN of the pass-through partner;
(vii) The pass-through partner's taxable year to which the
adjustments set forth in the statement described in paragraph (c)(1) of
this section relate;
(viii) The name and correct TIN of the affected partner (as defined
in Sec. 301.6226-3(e)(3)(i)) to whom the statement is being furnished;
(ix) The current or last address of the affected partner that is
known to the pass-through partner;
(x) The affected partner's share of items as originally reported to
such partner under section 6031(b) and, if applicable, section 6227,
for the taxable year to which the adjustments reflected on the
statement furnished to the pass-through partner relate;
(xi) The affected partner's share of partnership adjustments
determined under Sec. 301.6227-2(e)(2) as if the affected partner were
the reviewed year partner and the partnership were the pass-through
partner; and
(xii) Any other information required by forms, instructions, and
other guidance prescribed by the IRS.
(4) Partners of the pass-through partner must take into account the
adjustments. For purposes of paragraph (c) of this section, when taking
into account the adjustments as described in Sec. 301.6226-
3(e)(3)(iv), the rules under Sec. 301.6226-3(d)(4) (regarding the
increased rate of interest) do not apply, and the last sentence in
Sec. 301.6226-3(b)(1) (regarding the prohibition on correction amounts
being less than zero) is disregarded. Therefore, an affected partner
may reduce chapter 1 tax for the reporting year by the amount
determined in accordance with Sec. 301.6226-3.
* * * * *
0
Par. 8. Section 301.6231-1 is added to read as follows:
Sec. 301.6231-1 Notice of proceedings and adjustments.
(a) Notices to which this section applies. In the case of any
administrative proceeding under subchapter C of chapter 63 of the
Internal Revenue Code (subchapter C of chapter 63), including an
administrative proceeding with respect to an administrative adjustment
request (AAR) filed by a partnership under section 6227, the following
notices must be mailed to the partnership and the
[[Page 60162]]
partnership representative (as described in section 6223 and Sec.
301.6223-1)--
(1) Notice of any administrative proceeding initiated at the
partnership level with respect to an adjustment of any item of income,
gain, loss, deduction, or credit (as defined in Sec. 301.6221(a)-
1(b)(1)) of a partnership for a partnership taxable year, or any
partner's distributive share (as described in Sec. 301.6221(a)-
1(b)(2)) thereof, under subchapter C of chapter 63 (notice of
administrative proceeding (NAP));
(2) Notice of any proposed partnership adjustment resulting from an
administrative proceeding under subchapter C of chapter 63 (notice of
proposed partnership adjustment (NOPPA)); and
(3) Notice of any final partnership adjustment resulting from an
administrative proceeding under subchapter C of chapter 63 (notice of
final partnership adjustment (FPA)).
(b) Time for mailing notices--(1) Notice of proposed partnership
adjustment. A NOPPA is timely if it is mailed before the expiration of
the period for making adjustments under section 6235(a)(1) (including
any extensions under section 6235(b) and any special rules under
section 6235(c)).
(2) Notice of final partnership adjustment. An FPA may not be
mailed earlier than 270 days after the date on which the NOPPA is
mailed unless the partnership agrees, in writing, with the Internal
Revenue Service (IRS) to waive the 270-day period. See Sec. 301.6225-
2(c)(3)(iii) for the effect of a waiver under this paragraph (b)(2) on
the 270-period for requesting a modification under section 6225(c). See
Sec. 301.6232-1(d)(2) for the rules regarding a waiver of the
limitations on assessment under Sec. 301.6232-1(c).
(c) Last known address. A notice described in paragraph (a) of this
section is sufficient if mailed to the last known address of the
partnership representative and the partnership (even if the partnership
or partnership representative has terminated its existence).
(d) Notice mailed to partnership representative--(1) In general. A
notice described in paragraph (a) of this section will be treated as
mailed to the partnership representative if the notice is mailed to the
partnership representative that is reflected in the IRS records as of
the date the letter is mailed.
(2) No partnership representative in effect. In any case in which
no partnership representative designation is in effect in accordance
with Sec. 301.6223-1(f)(2), a notice described in paragraph (a) of
this section mailed to ``PARTNERSHIP REPRESENTATIVE'' at the last known
address of the partnership satisfies the requirements of section
6231(a).
(e) Restrictions on additional FPAs after petition filed. The IRS
may mail more than one FPA to any partnership for any partnership
taxable year. However, except in the case of fraud, malfeasance, or
misrepresentation of a material fact, the IRS may not mail an FPA to a
partnership with respect to a partnership taxable year after the
partnership has filed a timely petition for readjustment under section
6234 with respect to an FPA issued with respect to such partnership
taxable year.
(f) Withdrawal of NAP or NOPPA. The IRS may, without consent of the
partnership, withdraw any NAP or NOPPA. A NAP or NOPPA that has been
withdrawn by the IRS has no effect for purposes of subchapter C of
chapter 63. For instance, if the IRS withdraws a NAP with respect to a
partnership taxable year, the prohibition under section 6227(c) on
filing an AAR after the mailing of a NAP no longer applies with respect
to such taxable year.
(g) Rescission of FPA. The IRS may, with the consent of the
partnership, rescind any FPA. An FPA that is rescinded is not an FPA
for purposes of subchapter C of chapter 63, and the partnership cannot
bring a proceeding under section 6234 with respect to such FPA.
(h) Applicability date--(1) In general. Except as provided in
paragraph (h)(2) of this section, this section applies to partnership
taxable years beginning after December 31, 2017.
(2) Election under Sec. 301.9100-22T in effect. This section
applies to any partnership taxable year beginning after November 2,
2015 and before January 1, 2018 for which a valid election under Sec.
301.9100-22T is in effect.
0
Par. 9. Section 301.6232-1 is added to read as follows:
Sec. 301.6232-1 Assessment, collection, and payment of imputed
underpayment.
(a) In general. An imputed underpayment determined under subchapter
C of chapter 63 of the Internal Revenue Code (Code) is assessed and
collected in the same manner as if the imputed underpayment were a tax
imposed by subtitle A of the Code for the adjustment year (as defined
in Sec. 301.6241-1(a)(1)) except that the deficiency procedures under
subchapter B of chapter 63 of the Code do not apply to an assessment of
an imputed underpayment. Accordingly, no notice under section 6212 is
required for, and the restrictions under section 6213 do not apply to,
the assessment of any imputed underpayment. See paragraph (c) of this
section for limitations on assessment and paragraph (d) of this section
for exceptions to restrictions on adjustments.
(b) Payment of the imputed underpayment. Upon receipt of notice and
demand from the Internal Revenue Service (IRS), an imputed underpayment
must be paid by the partnership at the place and time stated in the
notice. In the case of an adjustment requested in an administrative
adjustment request (AAR) under section 6227(b)(1) that is taken into
account by the partnership under Sec. 301.6227-2(b), payment of the
imputed underpayment is due on the date the AAR is filed. The IRS may
assess the amount of the imputed underpayment reflected on the AAR on
the date the AAR is filed. For interest with respect to an imputed
underpayment, see Sec. 301.6233(a)-1(b).
(c) Limitation on assessment. Except as otherwise provided by this
section, no assessment of an imputed underpayment may be made (and no
levy or proceeding in any court for the collection of an imputed
underpayment may be made, begun, or prosecuted) before--
(1) The close of the 90th day after the day on which a notice of a
final partnership adjustment (FPA) was mailed under section 6231(a)(3);
and
(2) If a petition for readjustment is filed under section 6234 with
respect to such FPA, the decision of the court has become final.
(d) Exceptions to restrictions on adjustments and assessments--(1)
Adjustments treated as mathematical or clerical errors--(i) In general.
A notice to a partnership that, on account of a mathematical or
clerical error appearing on the partnership return or as a result of a
failure by a partnership-partner (as defined in Sec. 301.6241-1(a)(7))
to comply with section 6222(a), the IRS has adjusted or will adjust
items of income, gain, loss, deduction, or credit (as defined in Sec.
301.6221(a)-1(b)(1)) to correct the error or to make the items
consistent under section 6222(a) and has assessed or will assess any
imputed underpayment (determined in accordance with Sec. 301.6225-1)
resulting from the adjustment is not considered an FPA under section
6231(a)(3). A petition for readjustment under section 6234 may not be
filed with respect to such notice. The limitations under section
6232(b) and paragraph (c) of this section do not apply to an assessment
under this paragraph (d)(1)(i). For the definition of mathematical or
clerical error generally, see section 6213(g)(2). For application of
mathematical or
[[Page 60163]]
clerical error in the case of inconsistent treatment by a partner that
fails to give notice, see Sec. 301.6222-1(b).
(ii) Request for abatement--(A) In general. Except as provided in
paragraph (d)(1)(ii)(B) of this section, a partnership that is mailed a
notice described in paragraph (d)(1)(i) of this section may file with
the IRS, within 60 days after the date of such notice, a request for
abatement of any assessment of an imputed underpayment specified in
such notice. Upon receipt of the request, the IRS must abate the
assessment. Any subsequent assessment of an imputed underpayment with
respect to which abatement was made is subject to the provisions of
subchapter C of chapter 63 of the Code, including the limitations under
paragraph (c) of this section.
(B) Adjustments with respect to inconsistent treatment by a
partnership-partner. If an adjustment that is the subject of a notice
described in paragraph (d)(1)(i) of this section is due to the failure
of a partnership-partner to comply with section 6222(a), paragraph
(d)(1)(ii)(A) of this section does not apply, and abatement of any
assessment specified in such notice is not available. However, prior to
assessment, a partnership-partner that has failed to comply with
section 6222(a) may correct the inconsistency by filing an
administrative adjustment request under section 6227 or filing an
amended partnership return and furnishing amended statements, as
appropriate.
(iii) Partnerships that have an election under section 6221(b) in
effect. In the case of a partnership-partner that has an election under
section 6221(b) in effect for the reviewed year (as defined in Sec.
301.6241-1(a)(8)), any tax resulting from an adjustment due to the
partnership-partner's failure to comply with section 6222(a) may be
assessed with respect to the reviewed year partners (as defined in
Sec. 301.6241-1(a)(9)) of the partnership-partner (or indirect
partners of the partnership-partner, as defined in Sec. 301.6241-
1(a)(4)). Such tax may be assessed in the same manner as if the tax
were on account of a mathematical or clerical error appearing on the
reviewed year partner's or indirect partner's return, except that the
procedures under section 6213(b)(2) for requesting an abatement of such
assessment do not apply.
(2) Partnership may waive limitations. A partnership may at any
time by a signed notice in writing filed with the IRS waive the
limitations under paragraph (c) of this section (whether or not an FPA
has been mailed under section 6231(a)(3) by the IRS at the time of the
waiver).
(e) Limit on amount of imputed underpayment where no proceeding is
begun. If no proceeding under section 6234 is begun with respect to an
FPA mailed under section 6231(a)(3) before the close of the 90th day
after the day on which such FPA was mailed, the amount for which the
partnership is liable under section 6225 with respect to such FPA
cannot exceed the amount determined in such FPA.
(f) Applicability date--(1) In general. Except as provided in
paragraph (f)(2) of this section, this section applies to partnership
taxable years beginning after December 31, 2017.
(2) Election under Sec. 301.9100-22T in effect. This section
applies to any partnership taxable year beginning after November 2,
2015 and before January 1, 2018 for which a valid election under Sec.
301.9100-22T is in effect.
0
Par. 10. Section 301.6233(a)-1 is added to read as follows:
Sec. 301.6233(a)-1 Interest and penalties determined from reviewed
year.
(a) Interest and penalties with respect to the reviewed year.
Except to the extent provided in section 6226(c) and the regulations
thereunder, in the case of a partnership adjustment (as defined in
Sec. 301.6241-1(a)(6)) for a reviewed year (as defined in Sec.
301.6241-1(a)(8)), a partnership is liable for--
(1) Interest computed in accordance with paragraph (b) of this
section; and
(2) Any penalty, addition to tax, or additional amount as provided
under paragraph (c) of this section.
(b) Computation of interest with respect to partnership adjustments
for the reviewed year. The interest imposed on an imputed underpayment
resulting from partnership adjustments for the reviewed year is the
interest that would be imposed under chapter 67 of the Internal Revenue
Code (Code) if the imputed underpayment were treated as an underpayment
of tax for the reviewed year. The interest imposed on an imputed
underpayment under this paragraph (b)(1) begins on the day after the
due date of the partnership return (without regard to extension) for
the reviewed year and ends on the earlier of--
(1) The date prescribed for payment (as described in Sec.
301.6232-1(b));
(2) The due date of the partnership return (without regard to
extension) for the adjustment year (as defined in Sec. 301.6241-
1(a)(1)); or
(3) The date the imputed underpayment is fully paid.
(c) Penalties with respect to partnership adjustments for the
reviewed year--(1) In general. In accordance with section 6221(a), the
applicability of any penalties, additions to tax, and additional
amounts that relate to a partnership adjustment for the reviewed year
is determined at the partnership level as if the partnership had been
an individual subject to tax imposed by chapter 1 of subtitle A of the
Code for the reviewed year, and the imputed underpayment were an actual
underpayment of tax or understatement for such year. Nothing in this
paragraph (c)(1) affects the application of any penalty, addition to
tax, or additional amount that may apply to the partnership or to any
reviewed year partner (as defined in Sec. 301.6241-1(a)(9)) or to any
indirect partner (as defined in Sec. 301.6241-1(a)(4)) that is
unrelated to a partnership adjustment under subchapter C of chapter 63
of the Code.
(2) Coordination with accuracy-related and fraud penalty
provisions--(i) In general. In the case of penalties imposed under
section 6662, section 6662A, and section 6663 with respect to
partnership adjustments in accordance with paragraph (c)(1) of this
section, the rules described in paragraphs (c)(2)(ii), (iii), (iv), and
(v) of this section apply.
(ii) Determining the portion of the imputed underpayment to which a
penalty applies--(A) In general. In the case of penalties imposed under
section 6662, section 6662A, and section 6663, paragraph (c)(2)(ii) of
this section applies if--
(1) There is at least one adjustment with respect to which no
penalty has been imposed and at least one adjustment with respect to
which a penalty has been imposed; or
(2) There are at least two adjustments with respect to which
penalties have been imposed and the penalties have different rates.
(B) Calculating the portion of the imputed underpayment to which
the penalty applies. In computing the portion of an imputed
underpayment to which a penalty applies, adjustments that do not result
in the imputed underpayment (as described in Sec. 301.6225-1(c)(2))
are not taken into account. The portion of an imputed underpayment to
which a penalty applies is calculated as follows--
(1) All the partnership adjustments that resulted in the imputed
underpayment are grouped together according to whether they are
adjustments with respect to which a penalty has been imposed and, if
so, according to rate of penalty. Negative adjustments as defined in
paragraph (c)(2)(ii)(C) of this section are grouped
[[Page 60164]]
in accordance with paragraphs (c)(2)(ii)(D) and (E) of this section.
(2) Within each grouping described in paragraph (c)(2)(ii)(B)(1) of
this section, multiply the portion of each non-credit partnership
adjustment by the rate that applied to such portion when calculating
the imputed underpayment. See Sec. Sec. 301.6225-1(c)(1)(i); 301.6225-
2(b)(3)(iii)(B), (d)(4).
(3) Within each grouping, add the amounts that were calculated
under paragraph (c)(2)(ii)(B)(2) of this section.
(4) Within each grouping, increase or decrease the amounts that
were calculated under paragraph (c)(2)(ii)(B)(3) of this section by any
credit adjustments.
(C) Negative adjustments. An adjustment that resulted in the
imputed underpayment that is an increase in an item of loss, deduction,
or credit or a decrease to an item of income or gain is a negative
adjustment.
(D) Grouping of negative adjustments. Negative adjustments are
grouped under paragraph (c)(2)(ii)(B)(1) of this section in the
following order--
(1) Partnership adjustments with respect to which no penalties have
been imposed;
(2) Adjustments with respect to which a penalty has been imposed at
a 20 percent rate;
(3) Adjustments with respect to which a penalty has been imposed at
a 30 percent rate;
(4) Adjustments with respect to which a penalty has been imposed at
a 40 percent rate;
(5) Adjustments with respect to which a penalty has been imposed at
a 75 percent rate.
(E) Negative adjustments that reduce a grouping to zero. If when
allocating the negative adjustments under paragraph (c)(2)(ii)(D) of
this section, the amount calculated in paragraph (c)(2)(ii)(B) of this
section for a particular grouping equals zero, any remaining negative
adjustments (or portion thereof) that would otherwise reduce the amount
to less than zero are allocated to the next grouping in sequential
order under paragraph (c)(2)(ii)(D) of this section.
(F) Fraud penalties under section 6663. If any portion of an
imputed underpayment is determined by the IRS to be attributable to
fraud, the entire imputed underpayment is treated as attributable to
fraud. This paragraph (c)(2)(ii)(F) does not apply to any portion of
the imputed underpayment the partnership establishes by a preponderance
of the evidence is not attributable to fraud.
(iii) Substantial understatement penalty under section 6662(d)--(A)
In general. For purposes of application of the penalty under section
6662(d) (substantial understatement of income tax), the imputed
underpayment is treated as an understatement under section 6662(d)(2).
To determine whether an imputed underpayment treated as an
understatement under this paragraph (c)(3)(iii)(A) is a substantial
understatement under section 6662(d)(1), the rules of section
6662(d)(1)(A) apply by treating the amount described in paragraph
(c)(3)(iii)(B) of this section as the tax required to be shown on the
return for the taxable year under section 6662(d)(1)(A)(i).
(B) Amount of tax required to be shown on the return. The amount
described in this paragraph (c)(3)(iii)(B) is the tax that would result
by treating the net ordinary business income or loss of the partnership
for the reviewed year, reflecting any partnership adjustments as
finally determined, as taxable income described in section 1(c)
(determined without regard to section 1(h)).
(iv) Reportable transaction understatement under section 6662A. For
purposes of application of the penalty under section 6662A (reportable
transaction understatement penalty), the portion of an imputed
underpayment attributable to an item described under section
6662A(b)(2) is treated as a reportable transaction understatement under
section 6662A(b).
(v) Reasonable cause and good faith. For purposes of determining
whether a partnership satisfies the reasonable cause and good faith
exception under section 6664(c) or (d) with respect to a penalty under
section 6662, section 6662A, or section 6663, the partnership is
treated as the taxpayer. See Sec. 1.6664-4 of this chapter.
Accordingly, the facts and circumstances taken into account to
determine whether the partnership has established reasonable cause and
good faith are the facts and circumstances applicable to the
partnership. A partner-level defense (as described in Sec. 301.6226-
3(i)(3)) may not be raised in a proceeding of the partnership except as
provided under the modification procedures set forth in Sec. 301.6225-
2(d)(2) (amended returns) or in Sec. 301.6225-2(d)(8) (partner closing
agreements).
(3) Examples. The following examples illustrate the rules of
paragraph (c) of this section. For purposes of these examples, each
partnership has a calendar taxable year, and the highest tax rate in
effect for all taxpayers is 40 percent for all relevant periods.
Example 1. One adjustment with respect to which a penalty is
imposed. In an administrative proceeding with respect to
Partnership's 2018 partnership return, the IRS determines that
Partnership understated ordinary income by $100. The $100
understatement is due to negligence or disregard of rules or
regulations under section 6662(c), and a 20-percent accuracy-related
penalty applies under section 6662(a). The IRS also determines that
Partnership understated long-term capital gain by $300, but no
penalty applies with respect to that adjustment. Partnership does
not request modification of the imputed underpayment under section
6225 and does not raise any penalty defenses prior to issuance of
the notice of final partnership adjustment (FPA). In the FPA, the
IRS determines that the imputed underpayment is $160 (($100 + $300)
x 40 percent). In determining the penalty, the $100 adjustment (to
which the 20-percent penalty relates) is grouped separately from the
$300 adjustment (to which no penalty applies). The portion of the
imputed underpayment to which the 20-percent penalty applies is $40
($100 x 40 percent), and the penalty is $8 ($40 x 20 percent).
Example 2. More than one adjustment with respect to which the
same rate of penalty is imposed. The facts are the same as in
Example 1 of this paragraph (c)(3), except that the IRS determines
that Partnership also overstated its credits by $10. The
overstatement of credits is due to negligence or disregard of rules
or regulations under section 6662(c), and a 20-percent accuracy-
related penalty applies under section 6662(a). Because the
Partnership did not request modification, the imputed underpayment
is $170 (($100 + $300) x 40 percent) + $10). In determining the
penalty, the $10 credit adjustment and the $100 understatement of
income, both of which are adjustments with respect to which the 20-
percent accuracy-related penalty is imposed, are grouped together.
Accordingly, the portion of the imputed underpayment to which the
20-percent accuracy-related penalty applies is $50 (($100 x 40
percent) + $10), and the penalty is $10 ($50 x 20 percent).
Example 3. Negative adjustment. The facts are the same as in
Example 2 of this paragraph (c)(3), except that there is also an
adjustment that reduces ordinary income by $50. In calculating the
imputed underpayment under Sec. 301.6225-1, the $50 decrease to
ordinary income is netted with the $100 increase in ordinary income.
Therefore, the $50 decrease in ordinary income is an adjustment that
resulted in the imputed underpayment and therefore a negative
adjustment described in paragraph (c)(2)(ii)(C) of this section.
Because Partnership did not request modification, the imputed
underpayment is $150 (($100-$50) + $300) x 40 percent) + $10). To
determine the portion of the imputed underpayment to which the 20-
percent accuracy-related penalty applies, the $50 reduction to
ordinary income is grouped with the $300 adjustment to long-term
capital gain (in accordance with paragraph (c)(2)(ii)(D) of this
section). Accordingly, the portion of the imputed underpayment to
which the 20-percent accuracy-related penalty applies is $50 (($100
x 40 percent) + $10), and the penalty is $10 ($50 x 20 percent).
[[Page 60165]]
Example 4. Two adjustments with respect to which penalties of
different rates have been imposed. The facts are the same as in
Example 3 of this paragraph (c)(3), except that the $300 adjustment
to long-term capital gain is due to a gross valuation misstatement.
A 40-percent accuracy-related penalty under section 6662(a) and (h)
applies to the portion of the imputed underpayment attributable to
the gross valuation misstatement. The imputed underpayment is $150
(($100-$50) + $300) x 40 percent) + $10). Under paragraph
(c)(2)(ii)(B) of this section, the adjustment to long-term capital
gain (the adjustment to which the 40-percent penalty relates) and
the adjustments to ordinary income and credits (the adjustments to
which the 20-percent penalty relates) are grouped separately. In
accordance with paragraph (c)(2)(ii)(D) of this section, because
there are no partnership adjustments with respect to which no
penalties have been imposed, the $50 reduction in ordinary income
(the negative adjustment) is allocated to the grouping of
adjustments with respect to which the 20-percent penalty is imposed.
The amount described under paragraph (c)(2)(ii)(B) of this section
with respect to the 20-percent penalty grouping is $30 (($100 x 40
percent)-($50 x 40 percent) + 10). Therefore, the portion of the
imputed underpayment to which the 20 percent accuracy-related
penalty applies is $30 and the penalty is $6 ($30 x 20 percent). The
portion of the imputed underpayment to which the 40-percent gross
valuation misstatement penalty applies is $120 ($300 x 40 percent),
and the penalty is $48 ($120 x 40 percent). The accuracy-related
penalty under section 6662(a) is $54.
Example 5. Modification with respect to tax-exempt partner. The
IRS initiates an administrative proceeding with respect to
Partnership's 2019 taxable year. Partnership has four equal partners
during its 2019 taxable year: Two partners are partnerships, A and
B; one partner is a tax-exempt entity, C; and the fourth partner is
an individual, D. The IRS timely mails a notice of proposed
partnership adjustment (NOPPA) to Partnership for its 2019 taxable
year proposing a single partnership adjustment increasing
Partnership's ordinary income by $400,000. The $400,000 increase in
income is due to negligence or disregard of rules or regulations
under section 6662(c). A 20-percent accuracy-related penalty under
section 6662(a) and (c) applies to the portion of the imputed
underpayment attributable to the negligence or disregard of the
rules or regulations. In the NOPPA, the IRS determines an imputed
underpayment of $160,000 ($400,000 x 40 percent); the portion of the
imputed underpayment to which the 20-percent penalty applies is
$32,000 ($160,000 x 20 percent). Partnership requests modification
under Sec. 301.6225-2(d)(3) (regarding tax-exempt partners) with
respect to the amount of additional income allocated to C, and the
IRS approves the request. After modification of the imputed
underpayment, the imputed underpayment is $120,000 (($400,000-
$100,000) x 40 percent), and the penalty is $24,000 ($120,000 x 20
percent).
Example 6. Amended return modification. The facts are the same
as in Example 5 of this paragraph (c)(3), except in addition to the
modification with respect to C's tax-exempt status, Partnership
requests a modification under Sec. 301.6225-2(d)(2) (regarding
amended returns) with respect to the $100,000 of additional income
allocated to D. In accordance with the rules under Sec. 301.6225-
2(d)(2), D files an amended return for D's 2019 taxable year taking
into account $100,000 of additional ordinary income. In addition, in
accordance with Sec. 301.6225-2(d)(2)(viii), D takes into account
on D's return the 20-percent accuracy-related penalty for negligence
or disregard of rules or regulations that relates to the ordinary
income adjustment. D's tax attributes for other taxable years are
not affected. The IRS approves the modification. As a result,
Partnership's total netted partnership adjustment under Sec.
301.6225-1(c)(3) is $200,000 ($400,000 less $100,000 allocable to C
and $100,000 taken into account by D). The imputed underpayment,
after modification, is $80,000 ($200,000 x 40 percent), and the
penalty is $16,000 ($80,000 x 20 percent).
(d) Applicability date--(1) In general. Except as provided in
paragraph (d)(2) of this section, this section applies to partnership
taxable years beginning after December 31, 2017.
(2) Election under Sec. 301.9100-22T in effect. This section
applies to any partnership taxable year beginning after November 2,
2015 and before January 1, 2018 for which a valid election under Sec.
301.9100-22T is in effect.
0
Par. 11. Section 301.6233(b)-1 is added to read as follows:
Sec. 301.6233(b)-1 Interest and penalties with respect to the
adjustment year return.
(a) Interest and penalties with respect to failure to pay imputed
underpayment on the date prescribed. In the case of any failure to pay
an imputed underpayment on the date prescribed for such payment (as
described in Sec. 301.6232-1(b)), a partnership is liable for--
(1) Interest as determined under paragraph (c) of this section; and
(2) Any penalty, addition to tax, or additional amount as
determined under paragraph (d) of this section.
(b) Imputed underpayments to which this section applies. This
section applies to the portion of an imputed underpayment determined by
the IRS under section 6225(a)(1), or an imputed underpayment resulting
from adjustments requested by a partnership in an administrative
adjustment request under section 6227, that is not paid by the date
prescribed for payment under Sec. 301.6232-1(b).
(c) Interest. Interest determined under this paragraph (c) is the
interest that would be imposed under chapter 67 of the Internal Revenue
Code (Code) by treating any unpaid amount of the imputed underpayment
as an underpayment of tax imposed for the adjustment year (as defined
in Sec. 301.6241-1(a)(1)). The interest under this paragraph (c)
begins on the date prescribed for payment (as described in Sec.
301.6232-1(b)) and ends on the date payment of the imputed underpayment
is made.
(d) Penalties. If a partnership fails to pay an imputed
underpayment by the date prescribed for payment (as described in Sec.
301.6232-1(b)), section 6651(a)(2) applies to such failure, and any
unpaid amount of the imputed underpayment is treated as if it were an
underpayment of tax for purposes of part II of subchapter A of chapter
68 of the Code. For purposes of this section, the penalty under
6651(a)(2) is applied by treating the unpaid amount of the imputed
underpayment as the unpaid amount shown as tax on a return required
under subchapter A of chapter 61 of the Code.
(e) Applicability date--(1) In general. Except as provided in
paragraph (e)(2) of this section, this section applies to partnership
taxable years beginning after December 31, 2017.
(2) Election under Sec. 301.9100-22T in effect. This section
applies to any partnership taxable year beginning after November 2,
2015 and before January 1, 2018 for which a valid election under Sec.
301.9100-22T is in effect.
0
Par. 12. Section 301.6234-1 is added to read as follows:
Sec. 301.6234-1 Judicial review of partnership adjustment.
(a) In general. Within 90 days after the date on which a notice of
a final partnership adjustment (FPA) with respect to any partnership
taxable year is mailed under section 6231(a)(3), a partnership may file
a petition for a readjustment of any partnership adjustment (as defined
in Sec. 301.6241-1(a)(6)) reflected in the FPA for such taxable year
(without regard to whether an election under section 6226 has been made
with respect to any imputed underpayment reflected in such FPA) with--
(1) The Tax Court;
(2) The district court of the United States for the district in
which the partnership's principal place of business is located; or
(3) The Court of Federal Claims.
(b) Jurisdictional requirement for bringing action in district
court or Court of Federal Claims. A petition for readjustment under
this section with respect to any partnership adjustment may be filed in
a district court of the United States or the Court of Federal Claims
only if the partnership filing the petition deposits with the Internal
[[Page 60166]]
Revenue Service (IRS), on or before the date the petition is filed, the
amount of any imputed underpayment resulting from the partnership
adjustment.
(c) Treatment of deposit as payment of tax. Any amount deposited in
accordance with paragraph (b) of this section, while deposited, will
not be treated as a payment of tax for purposes of the Internal Revenue
Code (Code). Notwithstanding the preceding sentence, an amount
deposited in accordance with paragraph (b) of this section will be
treated as a payment of tax for purposes of chapter 67 of the Code
(relating to interest). Interest will be allowed and paid in accordance
with section 6611.
(d) Effect of decision dismissing action. If an action brought
under this section is dismissed other than by reason of a rescission of
the FPA under section 6231(c) and Sec. 301.6231-1(g), the decision of
the court dismissing the action is considered as its decision that the
FPA is correct.
(e) Amount deposited may be applied against assessment. If the
limitations on assessment under section 6232(b) and Sec. 301.6232-1(c)
no longer apply with respect to an imputed underpayment for which a
deposit under paragraph (b) of this section was made, the IRS may apply
the amount deposited against any such imputed underpayment that is
assessed.
(f) Applicability date--(1) In general. Except as provided in
paragraph (f)(2) of this section, this section applies to partnership
taxable years beginning after December 31, 2017.
(2) Election under Sec. 301.9100-22T in effect. This section
applies to any partnership taxable year beginning after November 2,
2015 and before January 1, 2018 for which a valid election under Sec.
301.9100-22T is in effect.
0
Par. 13. Section 301.6235-1 is added to read as follows:
Sec. 301.6235-1 Period of limitations on making adjustments.
(a) In general. Except as provided in section 6235(c) and (d) and
paragraph (b) of this section (regarding extensions), no partnership
adjustment (as defined in Sec. 301.6241-1(a)(6)) for any partnership
taxable year may be made after the later of the date that is--
(1) 3 years after the latest of--
(i) The date on which the partnership return for such taxable year
was filed;
(ii) The return due date (as defined in section 6241(3)) for the
taxable year; or
(iii) The date on which the partnership filed an administrative
adjustment request with respect to such taxable year under section
6227; or
(2) The date described in paragraph (b) of this section with
respect to a request for modification; or
(3) The date described in paragraph (c) of this section with
respect to a notice of proposed partnership adjustment.
(b) Modification requested under section 6225(c)--(1) In general.
For purposes of paragraph (a)(2) of this section, in the case of any
request for modification of any imputed underpayment under section
6225(c), the date by which the Internal Revenue Service (IRS) may make
a partnership adjustment is the date that is 270 days (plus the number
of days of an extension of the modification period (as described in
Sec. 301.6225-2(c)(3)(i)) agreed to by the IRS under section
6225(c)(7) and Sec. 301.6225-2(c)(3)(ii)) after the date on which
everything required to be submitted to the IRS pursuant to section
6225(c) is so submitted.
(2) Date on which everything is required to be submitted--(i) In
general. For purposes of paragraph (b)(1) of this section, the date on
which everything required to be submitted to the IRS pursuant to
section 6225(c) is so submitted is the earlier of--
(A) The date the modification period ends (including extensions) as
described in Sec. 301.6225-2(c)(3)(i) and (ii); or
(B) The date the modification period expires as a result of a
waiver of the prohibition on mailing a notice of final partnership
adjustment (FPA) under Sec. 301.6231-1(b)(2). See Sec. 301.6225-
2(c)(3)(iii).
(ii) Incomplete submission has no effect. A determination by the
IRS that the information submitted as part of a request for
modification is incomplete has no effect on the applicability of
paragraph (b)(2) of this section.
(c) Notice of proposed partnership adjustment. For purposes of
paragraph (a)(3) of this section, the date by which the IRS may make a
partnership adjustment is the date that is 330 days (plus the number of
days of an extension of the modification period (as described in Sec.
301.6225-2(c)(3)(i)) agreed to by the IRS under section 6225(c)(7) and
Sec. 301.6225-2(c)(3)(ii)) after the date the last notice of proposed
partnership adjustment (NOPPA) is mailed under section 6231(a)(2),
regardless of whether modification is requested by the partnership
under section 6225(c).
(d) Extension by agreement. The periods described in paragraphs
(a), (b), and (c) of this section (including any extension of those
periods pursuant to this paragraph (d)) may be extended by an
agreement, in writing, entered into by the partnership and the IRS
before the expiration of such period.
(e) Examples. The following examples illustrate the rules of this
section. For purposes of these examples, each partnership has a
calendar taxable year.
Example 1. Partnership timely files its partnership return for
the 2020 taxable year on March 1, 2021. On September 1, 2023,
Partnership files an administrative adjustment request (AAR) under
section 6227 with respect to its 2020 taxable year. As of September
1, 2023, the IRS has not initiated an administrative proceeding
under subchapter C of chapter 63 of the Internal Revenue Code with
respect to Partnership's 2020 taxable year. Therefore, as of
September 1, 2023, under paragraph (a)(1) of this section, the
period for making partnership adjustments with respect to
Partnership's 2020 taxable year expires on September 1, 2026.
Example 2. Partnership timely files its partnership return for
the 2020 taxable year on the due date, March 15, 2021. On February
1, 2023, the IRS mails to Partnership and the partnership
representative of Partnership (PR) a notice of administrative
proceeding under section 6231(a)(1) with respect to Partnership's
2020 taxable year. Assuming no AAR has been filed with respect to
Partnership's 2020 taxable year and the IRS has not yet mailed a
NOPPA under section 6231(a)(2) with respect to Partnership's 2020
taxable year, the period for making partnership adjustments for
Partnership's 2020 taxable year expires on the date determined under
paragraph (a)(1) of this section, March 15, 2024.
Example 3. The facts are the same as in Example 2 of this
paragraph (e), except that on June 1, 2023, pursuant to Sec.
301.6235-1(d), PR signs an agreement extending the period for making
partnership adjustments under section 6235(a)(1) for Partnership's
2020 taxable year to December 31, 2025. In addition, on June 2,
2025, the IRS mails to Partnership and PR a timely NOPPA under
section 6231(a)(2). Pursuant to Sec. 301.6225-2(c)(3)(i), the
modification period expires on February 27, 2026 (270 days after
June 2, 2025, the date the NOPPA is mailed), but PR does not submit
a request for modification on or before this date. Under paragraph
(c) of this section, the date for purposes of paragraph (a)(3) of
this section is April 28, 2026, the date that is 330 days from the
mailing of the NOPPA. Because April 28, 2026 is later than the date
under paragraph (a)(1) of this section (December 31, 2025, as
extended under paragraph (d) of this section), and because no
modification was requested, paragraph (a)(2) of this section is not
applicable, April 28, 2026 is the date on which the period for
making partnership adjustments expires under section 6235.
Example 4. The facts are the same as in Example 3 of this
paragraph (e), except that PR notifies the IRS that Partnership will
be requesting modification. On January 5, 2026, PR and the IRS agree
to extend the modification period pursuant to section 6225(c)(7) and
Sec. 301.6225-2(c)(3)(ii) for 45 days--from February 27, 2026 to
April 13,
[[Page 60167]]
2026. PR submits the request for modification to the IRS on April
13, 2026. Therefore, the date determined under paragraph (b) of this
section is February 22, 2027, which is 270 days after the date
everything required to be submitted was so submitted pursuant to
paragraph (b)(2) of this section plus the additional 45-day
extension of the modification period agreed to by PR and the IRS.
Because February 22, 2027 is later than the date under paragraph
(a)(1) of this section (December 31, 2025, as extended under
paragraph (d) of this section) and the date under paragraph (a)(3)
of this section (June 12, 2026, which is 330 days from the date the
NOPPA was mailed plus the 45-day extension under section
6225(c)(7)), February 22, 2027 is the date on which the period for
making partnership adjustments expires under section 6235.
Example 5. The facts are the same as in Example 4 of this
paragraph (e), except that PR does not request an extension of the
modification period. On February 1, 2026, PR submits a request for
modification and PR, and the IRS agree in writing to waive the
prohibition on mailing an FPA pursuant to Sec. 301.6231-1(b)(2).
Pursuant to Sec. 301.6225-2(c)(3)(iii), the modification period
expires as of February 1, 2026, rather than February 27, 2026.
Accordingly, under paragraph (b)(2) of this section, the date on
which everything required to be submitted pursuant to section
6225(c) is so submitted is February 1, 2026, and the 270-day period
described in paragraph (b)(1) of this section begins to run on that
date. Therefore, the date for purposes of paragraph (a)(2) of this
section is October 29, 2026, which is 270 days after February 1,
2026, the date on which everything required to be submitted under
section 6225(c) is so submitted. Because October 29, 2026 is later
than the date under paragraph (a)(1) of this section (December 31,
2025, as extended under paragraph (d) of this section) and the date
under paragraph (a)(3) of this section (April 28, 2026), October 29,
2026 is the date on which the period for making partnership
adjustments expires under section 6235.
Example 6. The facts are the same as in Example 5 of this
paragraph (e), except PR completes its submission of information to
support a request for modification on July 1, 2025, but does not
execute a waiver pursuant to Sec. 301.6231-1(b)(2). Therefore,
pursuant to paragraph (b)(2) of this section, February 26, 2026, the
date the modification period expires, is the date on which
everything required to be submitted pursuant to section 6225(c) is
so submitted. As a result, the 270-day period described in paragraph
(b)(1) of this section expires on November 23, 2026. Because
November 23, 2026 is later than the date under paragraph (a)(1) of
this section (December 31, 2025, as extended under paragraph (d) of
this section) and the date under paragraph (a)(3) of this section
(April 28, 2026), November 23, 2026 is the date on which the period
for making partnership adjustments expires under section 6235.
(f) Applicability date--(1) In general. Except as provided in
paragraph (f)(2) of this section, this section applies to partnership
taxable years beginning after December 31, 2017.
(2) Election under Sec. 301.9100-22T in effect. This section
applies to any partnership taxable year beginning after November 2,
2015 and before January 1, 2018 for which a valid election under Sec.
301.9100-22T is in effect.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2017-27071 Filed 12-15-17; 11:15 am]
BILLING CODE 4830-01-P