[Federal Register Volume 64, Number 16 (Tuesday, January 26, 1999)]
[Rules and Regulations]
[Pages 3837-3840]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-885]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 8808]
RIN 1545-AW23
Modifications and Additions to the Unified Partnership Audit
Procedures
AGENCY: Internal Revenue Service, Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final and temporary regulations
relating to the unified partnership audit procedures added to the
Internal Revenue Code by the Tax Equity and Fiscal Responsibility Act
of 1982 (TEFRA). The unified partnership audit procedures generally
provide administrative rules for the auditing of partnership items at
the partnership level. These regulations modify the existing unified
partnership audit procedures to comply with the Taxpayer Relief Act of
1997 (1997 Act) and the Internal Revenue Service Restructuring and
Reform Act of 1998 (1998 Act), and add new regulations to administer
the new unified partnership audit provisions added by the 1997 Act. In
general, the text of these temporary regulations also serves as the
text of the proposed regulations set forth in the notice of proposed
rulemaking on this subject in the Proposed Rules section of this issue
of the Federal Register.
DATES: Effective Date: These regulations are effective January 26,
1999.
FOR FURTHER INFORMATION CONTACT: Robert G. Honigman, (202) 622-3050
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains temporary amendments to the Procedure and
Administration Regulations (26 CFR Part 301) relating to the unified
partnership audit procedures found in sections 6221 through 6233 of the
Internal Revenue Code (Code) and final regulations pertaining to the
applicable dates of Sec. 301.6231(a)(7)-1T(p)(2) and
Sec. 301.6231(a)(7)-1T(r)(1). Sections 1231 through 1243 of the
Taxpayer Relief Act of 1997, Public Law 105-34, 111 Stat. 788, modified
some of the existing procedures and added certain new rules. Section
3507 of the Internal Revenue Service Restructuring and Reform Act of
1998, Public Law 105-206, 112 Stat. 685, modified section 6231. This
document modifies existing regulations that, because of the 1997 Act or
the 1998 Act, no longer reflect current law.
Explanation of Provisions
Penalties Determined at the Partnership Level
Before the 1997 Act, the Internal Revenue Service (Service) could
impose penalties on a partner only through the application of the
deficiency procedures after the completion of a partnership level
proceeding. Forcing the Service to open deficiency proceedings against
the individual partners was inconsistent with the efficiency goal of
the unified partnership audit rules. The 1997 Act cured this problem by
providing that, for partnerships under audit for taxable years ending
after August 5, 1997, partnership level proceedings include the
determination of applicable penalties at the partnership level.
Partners now may raise any partner level defenses to the imposition of
penalties only in a subsequent refund action.
Consistent with these statutory changes, the temporary regulations
mandate that the partnership's penalty defenses are to be resolved
during the partnership proceeding. Nevertheless, any individual
defenses that a partner may have to the imposition of a penalty may be
brought by the partner in a refund action subsequent to the partnership
level determination. In order to minimize the burden on individual
partners to defend themselves by bringing their own refund suits, the
temporary regulations incorporate a large number of defenses at the
partnership level. The majority of a partner's defenses to the
imposition of penalties are not specific to a particular partner, but
can be determined by reference to the activities of the partnership.
The applicability of these defenses may be resolved at the partnership
level during the partnership proceeding. In addition, the temporary
regulations modify the computational adjustment rules to allow the
Service to assess penalties under those procedures.
Partial Settlements
The period for assessing tax with respect to partnership items
generally is the longer of the periods provided by section 6229 or
section 6501. For partnership items that convert to nonpartnership
items, section 6229(f) provides that the period for assessing tax shall
not expire before the date which is one year after the date that the
items became nonpartnership items. Section 6231(b)(1)(C) provides that
the partnership items of a partner for a partnership taxable year
become nonpartnership items as of the date the partner enters into a
settlement agreement with the Service with respect to such items. In
some audits, however, the taxpayer and the Service will enter into a
settlement agreement regarding some, but not all, of the taxpayer's
partnership items. The 1997 Act added a special rule for these partial
settlement agreements in section 6229(f)(2), providing that the period
for assessing any tax attributable to the settled items is determined
as if the partial settlement had not been executed. Thus, the
limitations period applicable to the last partnership item to be
resolved for the partnership's taxable year under audit is controlling
with respect to all disputed partnership items (including settled
items) for such partnership taxable year.
The temporary regulations state that the one year period for
assessing partnership items that convert to nonpartnership items
applicable to settlement agreements under section 6231(b)(1)(C) does
not apply to partial settlement agreements under section 6229(f)(2).
Moreover, the temporary regulations clarify that the partner remains
subject to the unified audit procedures regarding the nonsettled items.
Tax Matters Partner as a Debtor in Bankruptcy
Section 6229(b)(1)(B) provides that the statute of limitations
under section 6229 is extended with respect to all partners in the
partnership by an agreement entered into between the tax matters
partner (TMP) and the Service. Treas. Reg. Sec. 301.6231(a)(7)-
1(l)(1)(iv) (1996) and Temp. Treas. Reg. Sec. 301.6231(c)-7T(a) (1987),
however, provide that upon the filing of a petition naming a partner as
a debtor in a
[[Page 3838]]
bankruptcy proceeding, the partner/debtor's partnership items convert
to nonpartnership items, and if the partner/debtor was the TMP, that
status terminates. These rules were promulgated to avoid the
complications that the automatic stay provision contained in 11 U.S.C.
362(a)(8) would have on a unified partnership audit. As a result, if a
TMP executed a consent to extend the statute of limitations during a
period when the TMP was a debtor in a bankruptcy proceeding, the
consent would not be binding on the other partners. Under the
regulations, the person signing the agreement was ineligible to act as
the TMP and extend the statute as to all partners.
To resolve the uncertainty under prior law in the situation where a
TMP executes an agreement extending the statute of limitations as to
all partners while, unknown to the Service, the TMP is a debtor in a
bankruptcy proceeding, the 1997 Act provides that the Service may rely
on the executed statute extension agreement unless it is notified of
the TMP's bankruptcy proceeding. If the Service is not notified of the
TMP's bankruptcy proceeding, statute extensions granted by the TMP are
binding on all partners in the partnership.
The temporary regulations provide a mechanism for the TMP, or other
partners, to provide notice to the Service that the TMP is a debtor in
a bankruptcy proceeding and therefore is ineligible to serve as TMP and
extend the statute under section 6229. This mechanism is derived from
existing regulations that provide guidance on how to notify the Service
of information concerning a partnership's partners.
Small Partnership Exception
The 1997 Act amended the small partnership exception to the unified
partnership audit procedures found in section 6231. Formerly, in order
to qualify for the small partnership exception, the partnership had to
have 10 or fewer partners at all times during the tax year, each of
whom was a natural person (other than a nonresident alien) or an
estate, and for which each partner's share of each partnership item was
the same as that partner's share of every other partnership item. The
1997 Act amended the small partnership exception by allowing
partnerships to qualify for the exception even if they have a C
corporation for a partner or specially allocate some partnership items.
The temporary regulations modify the existing regulations interpreting
the small partnership exception to take account of this change in the
law.
Effective Date
These final and temporary regulations are applicable January 26,
1999. In accordance with section 7805(e)(2), the temporary regulations
contained herein shall expire January 25, 2002.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 533(b) of the Administrative Procedures Act (5 U.S.C. chapter
5) does not apply to these regulations. For the applicability of the
Regulatory Flexibility Act (5 U.S.C. chapter 6) refer to the Special
Analyses section of the preamble to the cross reference notice of
proposed rulemaking published in the Proposed Rules section in this
issue of the Federal Register. Pursuant to section 7805(f) of the
Internal Revenue Code, these final and temporary regulations will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.
Drafting information. The principal authors of these temporary
regulations are Robert G. Honigman, Office of the Assistant Chief
Counsel (Passthroughs & Special Industries), and William A. Heard,
Office of the Assistant Chief Counsel (Field Service). However, other
personnel from the Service and Treasury Department 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.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
Paragraph 1. The authority citation for part 301 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Amend Sec. 301.6221-1T by:
1. Redesignating paragraph (c) as paragraph (e).
2. Adding new paragraphs (c) and (d).
The additions read as follows:
Sec. 301.6221-1T Tax treatment determined at partnership level
(temporary).
* * * * *
(c) Penalties determined at partnership level (partnership taxable
years ending after August 5, 1997). Any penalty, addition to tax, or
additional amount that relates to an adjustment to a partnership item,
shall be determined at the partnership level. Partner level defenses to
such items can only be asserted through refund actions following
assessment and payment. Assessment of any penalty, addition to tax, or
additional amount that relates to an adjustment to a partnership item
shall be made based on partnership level determinations. Partnership
level determinations include all the legal and factual determinations
that underlie the determination of any penalty, addition to tax, or
additional amount, other than partner level defenses specified in
paragraph (d) of this section.
(d) Partner level defenses. Partner level defenses to any penalty,
addition to tax, or additional amount that relates to an adjustment to
a partnership item, may not be asserted in the partnership level
proceeding, but may be asserted through separate refund actions
following assessment and payment. See section 6230(c)(4). Partner level
defenses are limited to those that are personal to the partner or are
dependant upon the partner's separate return, and cannot be determined
at the partnership level. Examples of these determinations are: whether
any applicable threshold underpayment of tax has been met with respect
to the partner or whether the partner has met the criteria of section
6664(b)(penalties applicable only where return is filed), or section
6664(c)(1)(reasonable cause exception) subject to partnership level
determinations as to the applicability of section 6664(c)(2).
* * * * *
Par. 3. Amend Sec. 301.6223(c)-1T by adding a sentence to the end
of paragraph (c) to read as follows:
Sec. 301.6223(c)-1T Additional information regarding partners
furnished to the Service (temporary).
* * * * *
(c) * * * Furthermore, reference to a prior general notification to
the Service that a partner who would otherwise be the tax matters
partner is a debtor in a bankruptcy proceeding or has had a receiver
appointed for him in a receivership proceeding is not sufficient unless
a copy of the notification document referred to is attached to the
statement.
* * * * *
Par. 4. Amend Sec. 301.6224(c)-3T by:
1. Revising the section heading.
2. Revising paragraphs (b), (c)(3)(ii), and (d), Example (1).
[[Page 3839]]
The revisions read as follows:
Sec. 301.6224(c)-3T Consistent settlement terms (temporary).
* * * * *
(b) Requirements for consistent settlement terms--(1) In general.
Consistent settlement terms are those based on the same determinations
with respect to partnership items. However, consistent settlement terms
also may include partnership level determinations of any penalty,
addition to tax, or additional amount that relates to partnership
items. Settlements with respect to partnership items shall be self-
contained; thus, a concession by one party with respect to a
partnership item may not be based upon a concession by another party
with respect to any item that is not a partnership item other than any
penalty, addition to tax, or additional amount that relates to an
adjustment to a partnership item. Consistent agreements, whether
comprehensive or partial, must be identical to the original settlement
(that is, the settlement upon which the offered settlement terms are
based). A consistent agreement must mirror the original settlement and
may not be limited to selected items from the original settlement. Once
a partner has settled a partnership item, or penalty, addition to tax,
or additional amount that relates to an adjustment to a partnership
item, that partner may not subsequently request settlement terms
consistent with a settlement that contains the previously settled item.
The requirement for consistent settlement terms applies only if--
(i) The items were partnership items (and any related penalty,
addition to tax, or additional amount) for the partner entering into
the original settlement immediately before the original settlement; and
(ii) The items are partnership items (and any related penalty,
addition to tax, or additional amount) for the partner requesting the
consistent settlement at the time the partner files the request.
(2) Effect of consistent agreement. Consistent settlement terms are
reflected in a consistent agreement. A consistent agreement is not a
settlement agreement which gives rise to further consistent settlement
rights because it is required to be given without volitional agreement
of the Secretary. Therefore, a consistent agreement required to be
offered to a requesting taxpayer is not a settlement agreement under
section 6224(c)(2) of the Internal Revenue Code, or paragraph (c)(3) of
this section which starts a new period for requesting consistent
settlement terms. For all other purposes of the Internal Revenue Code,
however, (e.g., binding effect under section 6224(c)(1), and conversion
to nonpartnership items under section 6231(b)(1)(C)) a consistent
agreement is treated as a settlement agreement.
(c) * * *
(3) * * *
(ii) The 60th day after the day on which the settlement agreement
was entered into.
(d) * * *
Example (1). The Service seeks to disallow a $100,000 loss
reported by Partnership P. The Service agrees to a settlement with
X, a partner in P, in which the Service allows 60 percent of the
loss, accepts the treatment of all other partnership items on the
partnership return, and imposes a penalty for negligence related to
the loss disallowance. Partner Y, which owns a 10 percent interest
in the partnership, requests settlement terms which are consistent
with the settlement made between X and the Service. The items are
partnership items (and a related penalty) for X immediately before X
enters into the settlement agreement and are partnership items (and
a related penalty) for Y at the time of the request. The Service
must offer Y settlement terms allowing a $6,000 loss, a negligence
penalty on the $4,000 disallowance, and otherwise reflecting the
treatment of partnership items on the partnership return.
* * * * *
Par. 5. Add Sec. 301.6229(b)-2T to read as follows:
Sec. 301.6229(b)-2T Special rule with respect to debtors in Title 11
cases (temporary).
(a) In general. Notwithstanding any other law or rule of law, if an
agreement is entered into under section 6229(b)(1)(B), and the
agreement is signed by a person who would be the tax matters partner
but for the fact that, at the time that the agreement is executed, the
person is a debtor in a bankruptcy proceeding under Title 11 of the
United States Code, such agreement shall be binding on all partners in
the partnership unless the Service has been notified of the bankruptcy
proceeding in accordance with paragraph (b) of this section.
(b) Procedures for notifying the Service of a partner's bankruptcy
proceeding. (1) The Service shall be notified of the bankruptcy
proceeding of the tax matters partner in accordance with the procedures
set forth in Sec. 301.6223(c)-1T.
(2) In addition to the information specified in Sec. 301.6223(c)-
1T, notification that a person is (or was) a debtor in a bankruptcy
proceeding shall include the date the bankruptcy proceeding was filed,
the name and address of the court in which the bankruptcy proceeding
exists (or took place), the caption of the bankruptcy proceeding
(including the docket number or other identification number used by the
court), and the status of the proceeding as of the date of
notification.
Par. 6. Add Sec. 301.6229(f)-1T to read as follows:
Sec. 301.6229(f)-1T Special rule for partial settlement agreements
(temporary).
(a) In general. If a partner enters into a settlement agreement
with the Service with respect to the treatment of some of the
partnership items in dispute for a partnership taxable year, but other
partnership items for such year remain in dispute, the period of
limitations for assessing any tax attributable to the settled items
shall be determined as if such agreement had not been entered into.
(b) Other items remaining in dispute. Pursuant to section 6226(c),
a partner is a party to a partnership level judicial proceeding with
respect to partnership items. When a partner settles partnership items,
the settled partnership items convert to nonpartnership items under
section 6231(b)(1)(C) and will not be subject to any future or pending
partnership level proceeding pursuant to section 6226(d)(1). The
remaining unsettled partnership items, however, will remain subject to
determination under partnership level administrative and judicial
procedures. Consequently, any remaining unsettled items will be deemed
to remain in dispute. Thus, the period for assessing settled items will
be governed by the period for assessing the remaining unsettled items.
Par. 7. Amend Sec. 301.6231(a)(1)-1T by:
1. Revising the first two sentences of paragraph (a)(1).
2. Removing paragraph (a)(3).
3. Redesignating paragraph (a)(4) as paragraph (a)(3).
The revision reads as follows:
Sec. 301.6231(a)(1)-1T Exception for small partnerships (temporary).
(a) * * *
(1) ``10 or fewer.'' The ``10 or fewer'' limitation described in
section 6231(a)(1)(B)(i) is applied to the number of natural persons
(other than nonresident aliens), C corporations, and estates of
deceased partners that were partners at any one time during the
partnership taxable year. Thus, for example, a partnership that at no
time during the taxable year had more than 10 partners may be treated
as a small partnership even if, because of transfers of interests in
the partnership, 11 or more natural persons, C corporations, or estates
of deceased partners owned interests in the partnership for some
portion of the taxable year. * * *
* * * * *
[[Page 3840]]
Par. 8. Amend Sec. 301.6231(a)(6)-1T by:
1. Revising paragraph (a).
2. Removing paragraph (c).
The revision reads as follows:
Sec. 301.6231(a)(6)-1T Computational adjustments (temporary).
(a) In general. A change in the tax liability of a partner to
properly reflect the treatment of a partnership item under subchapter C
of chapter 63 of the Internal Revenue Code is made through a
computational adjustment. A computational adjustment includes a change
in tax liability that reflects a change in an affected item where that
change is necessary to properly reflect the treatment of a partnership
item, or any penalty, addition to tax, or additional amount that
relates to an adjustment to a partnership item. However, if a change in
a partner's tax liability cannot be made without making one or more
partner level determinations, that portion of the change in tax
liability attributable to the partner level determinations shall be
made under the provisions of subchapter B of chapter 63 of the Internal
Revenue Code (relating to deficiency procedures), except for any
penalty, addition to tax, or additional amount which relates to an
adjustment to a partnership item.
(1) Changes in a partner's tax liability with respect to affected
items that do not require partner level determinations (such as the
threshold amount of medical deductions under section 213 that changes
as the result of determinations made at the partnership level) are
computational adjustments that are directly assessed. When making
computational adjustments, the Service may assume that amounts the
partner reported on the partner's individual return include all amounts
reported to the partner by the partnership, absent contrary notice to
the Service (for example, a ``Notice of Inconsistent Treatment''). Such
an assumption by the Service does not constitute a partner level
determination. Moreover, substituting redetermined partnership items
for the partner's previously reported partnership items (including
partnership items included in carryover amounts) does not constitute a
partner level determination where the Service otherwise accepts all
nonpartnership items (including, for example, nonpartnership item
components of carryover amounts) as reported.
(2) Changes in a partner's tax liability with respect to affected
items that require partner level determinations (such as a partner's
at-risk amount to the extent it depends upon the source from which the
partner obtained the funds that the partner contributed to the
partnership) are computational adjustments subject to deficiency
procedures. Nevertheless, any penalty, addition to tax, or additional
amount that relates to an adjustment to a partnership item may be
directly assessed following a partnership proceeding, based on
determinations in that proceeding, regardless of whether partner level
determinations are required.
* * * * *
Par. 9. Amend Sec. 301.6231(a)(7)-1 by adding a sentence at the end
of paragraphs (p)(2) and (r)(1) to read as follows:
Sec. 301.6231(a)(7)-1 Designation or selection of tax matters partner.
* * * * *
(p) * * *
(2) * * * For regulations applicable on or after January 26, 1999
(reflecting statutory changes made effective July 22, 1998) and before
January 25, 2002, see Sec. 301.6231(a)(7)-1T(p)(2).
* * * * *
(r) * * * (1) * * * For regulations applicable on or after January
26, 1999 (reflecting statutory changes made effective July 22, 1998)
and before January 25, 2002, see Sec. 301.6231(a)(7)-1T(r)(1).
* * * * *
Par. 10. Add Sec. 301.6231(a)(7)-1T to read as follows:
Sec. 301.6231(a)(7)-1T Designation or selection of tax matters partner
(temporary).
(a) through (p)(1) [Reserved]. For further guidance, see
Sec. 301.6231(a)(7)-1(a) through (p)(1).
(p)(2) When each general partner is deemed to have no profits
interest in the partnership. If it is impracticable under
Sec. 301.6231(a)(7)-1(o)(2) to apply the largest-profits-interest rule
of Sec. 301.6231(a)(7)-1(m)(2), the Commissioner will select a partner
(including a general or limited partner) as the tax matters partner in
accordance with the criteria set forth in Sec. 301.6231(a)(7)-1(q). The
Commissioner will notify, within 30 days of the selection, the partner
selected, the partnership, and all partners required to receive notice
under section 6223(a), effective as of the date specified in the
notice. For regulations applicable before July 22, 1998, see
Sec. 301.6231(a)(7)-1(p)(2).
(p)(3) through (q) [Reserved]. For further guidance, see
Sec. 301.6231(a)(7)-1(p)(3) through (q).
(r) Notification of partnership--(1) In general. If the
Commissioner selects a tax matters partner under the provisions of
Sec. 301.6231(a)(7)-1(p)(1) or (3)(i), the Commissioner will notify,
within 30 days of the selection, the partner selected, the partnership,
and all partners required to receive notice under section 6223(a),
effective as of the date specified in the notice. For regulations
applicable before July 22, 1998, see Sec. 301.6231(a)(7)-1(r)(1).
(r)(2) [Reserved]. For further guidance, see Sec. 301.6231(a)(7)-
1(r)(2).
Approved: December 30, 1998.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue Service.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 99-885 Filed 1-25-99; 8:45 am]
BILLING CODE 4830-01-U