Rule2022-26783
Treatment of Special Enforcement Matters
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 9, 2022
Effective
December 9, 2022
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations that except certain partnership-related items from the centralized partnership audit regime created by the Bipartisan Budget Act of 2015, and sets forth alternative rules that will apply to the examination of excepted items by the IRS. The centralized partnership audit regime does not apply to a partnership-related item if the item involves a special enforcement matter described in these regulations. Additionally, these regulations make changes to the existing centralized partnership audit regime regulations to account for changes to the Internal Revenue Code (Code) as well as changes that clarify those regulations. The regulations affect partnerships and partners to whom special enforcement matters apply.
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<title>Federal Register, Volume 87 Issue 236 (Friday, December 9, 2022)</title>
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[Federal Register Volume 87, Number 236 (Friday, December 9, 2022)]
[Rules and Regulations]
[Pages 75473-75495]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-26783]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9969]
RIN 1545-BP01
Treatment of Special Enforcement Matters
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that except certain
partnership-related items from the centralized partnership audit regime
created by the Bipartisan Budget Act of 2015, and sets forth
alternative rules that will apply to the examination of excepted items
by the IRS. The centralized partnership audit regime does not apply to
a partnership-related item if the item involves a special enforcement
matter described in these regulations. Additionally, these regulations
make changes to the existing centralized partnership audit regime
regulations to account for changes to the Internal Revenue Code (Code)
as well as changes that clarify those regulations. The regulations
affect partnerships and partners to whom special enforcement matters
apply.
DATES:
Effective date: These regulations are effective on December 9,
2022.
Applicability date: For dates of applicability, see Sec. Sec.
301.6221(b)-1(f); 301.6225-1(i)(1); 301.6225-2(g)(1); 301.6225-3(e)(1);
301.6226-2(h)(1); 301.6241-3(g); 301.6241-7(j)
FOR FURTHER INFORMATION CONTACT: Jennifer M. Black of the Office of
Associate Chief Counsel (Procedure and Administration), (202) 317-6834
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final amendments to the Procedure and
Administration Regulations (26 CFR part 301) regarding special
enforcement matters under section 6241(11) of the Code and the
collection of amounts due under the centralized partnership audit
regime pursuant to section 6241(7) of the Code. Section 6241(11) was
enacted by section 206 of the Tax Technical Corrections Act of 2018,
contained in Title II of Division U of the Consolidated Appropriations
Act of 2018, Public Law 115-141 (TTCA). This document also contains
several amendments to the final regulations on the centralized
partnership audit regime published in TD 9844 (84 FR 6468) on February
27, 2019.
Section 1101(a) of the Bipartisan Budget Act of 2015, Public Law
114-74 (BBA) amended chapter 63 of the Code (chapter 63) by removing
former subchapter C of chapter 63 effective for partnership taxable
years beginning after December 31, 2017. Former subchapter C of chapter
63 contained the unified partnership audit and litigation rules enacted
by the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-
248 (TEFRA) that were commonly referred to as the TEFRA partnership
procedures, or simply TEFRA. Section 1101(b) of the BBA removed
subchapter D of chapter 63 and amended chapter 1 of the Code (chapter
1) by removing part IV of subchapter K of chapter 1, rules applicable
to electing large partnerships, effective for partnership taxable years
beginning after December 31, 2017. Section 1101(c) of the BBA replaced
the TEFRA partnership procedures and the rules applicable to electing
large partnerships with a centralized partnership audit regime that
determines adjustments and, in general, determines, assesses, and
collects tax at the partnership level. Section 1101(g) of the BBA set
forth the effective dates for these statutory amendments, which are
effective generally for returns filed for partnership taxable years
beginning after December 31, 2017. On December 18, 2015, section 1101
of the BBA was amended by the Protecting Americans from Tax Hikes Act
of 2015, Public Law 114-113 (PATH Act). The amendments under the PATH
Act are effective as if included in section 1101 of the BBA, and
therefore, subject to the effective dates in section 1101(g) of the
BBA.
Enacted on March 23, 2018, the TTCA made a number of technical
corrections to the centralized partnership audit regime, including
adding sections 6241(11) (regarding the treatment of special
enforcement matters) and 6232(f) (regarding the collection of the
imputed underpayment and other amounts due from partners of the
partnership in the event the amounts are not paid by the partnership)
to the Code. The amendments to subchapter C of chapter 63 included in
the TTCA are effective as if included in section 1101 of the BBA, and
therefore, subject to the effective dates in section 1101(g) of the
BBA.
On January 2, 2018, the Department of the Treasury (Treasury
Department) and the IRS published in the Federal Register (82 FR 28398)
final regulations under section 6221(b) providing rules
[[Page 75474]]
for electing out of the centralized partnership audit regime (TD 9829).
On August 9, 2018, the Treasury Department and the IRS published in
the Federal Register (83 FR 39331) final regulations under section 6223
providing rules relating to partnership representatives and final
regulations under Sec. 301.9100-22 providing rules for electing into
the centralized partnership audit regime for taxable years beginning on
or after November 2, 2015, and before January 1, 2018.
On February 27, 2019, the Treasury Department and the IRS published
in the Federal Register (84 FR 6468) final regulations implementing
sections 6221(a), 6222, and 6225 through 6241 of the centralized
partnership audit regime (TD 9844).
On November 24, 2020, the Treasury Department and the IRS published
in the Federal Register (85 FR 74940) a notice of proposed rulemaking
(REG-123652-18) (November 2020 NPRM) proposing rules to implement
section 6241(11) dealing with special enforcement matters and to make
changes to the regulations under the centralized partnership audit
regime. The Treasury Department and the IRS received written public
comments in response to the regulations proposed in the November 2020
NPRM, and a public hearing regarding the proposed regulations was held
on March 25, 2021.
After careful consideration of all written public comments received
in response to the November 2020 NPRM as well as statements made during
the public hearing, the November 2020 NPRM is adopted with the
revisions described in the preamble to this Treasury Decision in
response to those comments and statements.
Summary of Comments and Explanation of Revisions
Three written comments were received in response to the November
2020 NPRM. Two statements were made at the public hearing held on March
25, 2021. All of these comments (both written and provided orally at
the public hearings) have been considered, and revisions to the
regulations were made in response to the comments. The written comments
received are available for public inspection at <a href="http://www.regulations.gov">www.regulations.gov</a> or
upon request.
In addition to changes in response to the comments, editorial
revisions were made to correct typographical errors and grammatical
mistakes. Revisions were also made to clarify language in the proposed
regulations that was potentially unclear. Unless specifically described
in this Summary of Comments and Explanation of Revisions, such
revisions were not intended to change the meaning of the language that
was revised. Finally, the Treasury Department and the IRS have decided
not to finalize the proposed changes to Sec. 301.6241-3(d) and plan to
withdraw the proposed changes.
1. Applicability Date
Two comments were received regarding the applicability date of
clarifications that were made to the rules regarding elections out of
the centralized partnership audit regime. Proposed Sec. 301.6221(b)-
1(f) provided that all proposed adjustments to Sec. 301.6221(b)-1
would be applicable as of November 20, 2020, the date the November 2020
NPRM was filed for public inspection with the Federal Register. The
November 2020 NPRM proposed the addition of qualified subchapter S
subsidiaries (QSubs) as an additional example of partner to be added to
the list of ineligible partners under Sec. 301.6221(b)-1(b)(3)(ii).
One comment noted that while this additional example of ineligible
partner was included in Notice 2019-06, 2019-03 IRB 353 (January 14,
2019) announcing forthcoming proposed regulations, Notice 2019-06 also
included a rule for partnerships with QSub partners similar to the rule
for partnerships with S corporation partners under section
6221(b)(2)(A), but the proposed rule in the November 2020 NPRM did not
propose the rule previously described in Notice 2019-06. Both comments
recommended that the applicability date for this additional example of
ineligible partner should therefore not be November 20, 2020, but
should be applicable for partnership tax years ending after the date
the final rule is finalized and published in the Federal Register to
allow partnerships with QSub partners time to restructure if desired.
These comments are not adopted. The November 2020 NPRM did propose
rules that were not identical to the rules previously described in
Notice 2019-06, which is one reason the November 2020 NPRM did not
propose, pursuant to section 7805(b)(1)(C) of the Code, an
applicability date of January 14, 2019, the day that Notice 2019-06 was
issued. However, pursuant to section 7805(b)(1)(B) the November 2020
NPRM proposed an applicability date of November 20, 2020, the date that
the November 2020 NPRM was filed with the Federal Register. The
originally proposed applicability date of November 20, 2020, would have
little or no effect on taxpayers, whereas changing the proposed
applicability date to the date that this Treasury decision is published
in the Federal Register creates an administrative burden for the IRS.
The only possible effect on taxpayers is that they may be subject to
the centralized partnership audit procedures if they are selected for
examination by the IRS and it may require them to file an
administrative adjustment request (AAR) under section 6227 of the Code
in lieu of an amended Form 1065. For the IRS, absent this rule being
applicable on the proposed applicability date of November 20, 2020,
there would be uncertainty regarding whether the centralized
partnership audit regime applies to any partnership that has a QSub as
a partner during the period beginning on November 20, 2020, and ending
on the date of publication of this Treasury decision in the Federal
Register. This uncertainty could cause significant delays that hinder
the IRS's ability to examine these partnerships in a timely and
efficient fashion. By retaining the earlier proposed applicability date
of November 20, 2020, the final regulations provide certainty for both
the IRS and taxpayers.
One comment was received regarding the applicability dates for the
proposed regulations under Sec. Sec. 301.6225-1, 301.6225-2, 301.6226-
2, 301.6241-3, and 301.6241-7 in the November 2020 NPRM. The proposed
regulations proposed that the majority of the proposed rules would be
applicable on November 20, 2020, the date the November 2020 NPRM was
filed with the Federal Register. In contrast, proposed Sec. 301.6241-
7(b) would be applicable for partnership taxable years beginning on or
after December 20, 2018, the date Notice 2019-06 was published.
Although the comment noted that, under section 7805(b)(1), the final
regulations could be applicable to partnership taxable years ending on
or after November 20, 2020, or on or after December 20, 2018, for Sec.
301.6241-7(b), the comment recommended that all of the final
regulations be applicable to partnership taxable years ending after the
date the final rules are published in the Federal Register. The comment
suggests that this delay would give partnerships sufficient time after
the rules are finalized to adjust their internal tax compliance and
reporting procedures as well as review their existing partnership
agreements to account for the final rules.
The comment recommended that the majority of the final regulations
that were proposed in the November 2020 NPRM be applicable on the date
the final regulations are published in the Federal Register, but the
comment also recommended more specific changes to
[[Page 75475]]
some of the applicability dates. Under proposed Sec. 301.6241-3(g),
the changes to Sec. 301.6241-3 were proposed to be applicable to any
determinations made on or after November 20, 2020. The comment stated
that the rules under proposed Sec. 301.6241-3 could not, under section
7805(b)(1), be applicable for determinations on or after November 20,
2020, because then the rule would apply to taxable years ending prior
to November 20, 2020, which the comment said was not consistent with
section 7805(b)(1) as it provides that, except as otherwise provided,
``no temporary, proposed, or final regulation relating to the internal
revenue laws shall apply to any taxable period ending before the
earliest of'' certain dates, in this case the date on which the
proposed regulations were filed with the Federal Register.
The final rules under Sec. 301.6241-7, except for Sec. 301.6241-
7(b), were proposed to be applicable for taxable years beginning on or
after November 20, 2020, but also to any examinations or investigations
beginning after November 20, 2020. Similar to the comment regarding the
applicability of proposed Sec. 301.6241-3, the comment recommended
that the applicability date provision be removed as the comment noted
that this would allow the final regulations to be applicable to taxable
years ending before November 20, 2020, including taxable years
beginning prior to the applicability date of the centralized
partnership audit regime. The comment noted that although section
7805(b)(1)(C) permitted the final regulations to be applicable to
taxable years ending no earlier than the date Notice 2019-06 was
published, as it substantially described the expected contents of the
final regulations, the commenter felt as if this would not be within
the ``spirit'' of section 7805(b) given that over two years have passed
since Notice 2019-06 was published and could result in the provisions
being applied to examinations already in progress.
As the comment acknowledged, section 7805(b) provides that ``no
temporary, proposed, or final regulation relating to the internal
revenue laws shall apply to any taxable period ending before the
earliest of the following dates'': the date on which the final
regulations are filed with the Federal Register, the date on which the
proposed regulations were filed with the Federal Register, or the date
on which a notice substantially describing the expected contents of the
final regulations was issued to the public. As with the amendments to
the rules under Sec. 301.6221(b)-1, delaying the applicability date of
proposed Sec. Sec. 301.6225-1, 301.6225-2, 301.6226-2, 301.6241-3, and
301.6241-7 could hinder the IRS's ability to conduct examinations in a
timely and efficient manner and to utilize the assessment rules of
section 6232(f) for partnerships that fail to pay imputed
underpayments. It also could cause uncertainty for partnerships who may
have chapter 1 liabilities, adjustments to non-income items that do not
result in an imputed underpayment, or for partnerships that have
arranged their affairs to be consistent with Notice 2019-06 and the
proposed regulations.
Partnerships were notified of these proposed regulations on
November 20, 2020, and on December 20, 2018, for the rules in proposed
Sec. 301.6241-7(b). As the comment correctly noted, for the provisions
in proposed Sec. 301.6241-7(b), partnerships have had well over two
years to adjust their affairs in anticipation of the final regulations.
For the other regulations, partnerships have had since November 20,
2020, to arrange their affairs to account for the final regulations.
The Treasury Department and the IRS have determined that the
administrative burden placed on the IRS in not being able to utilize
final procedural rules (that is, rules not affecting the determination
of underlying tax liabilities) as soon as possible far outweighs giving
partnerships additional time to implement changes to account for
procedural rules the general substance of which they have been aware of
since November 20, 2020. Therefore, the suggestion to make the
regulations applicable as of the date the final regulations are
published in the Federal Register is not adopted.
In addition, although the comment expressed concerns that the final
regulations could apply to taxable years beginning before the
applicability date of the centralized partnership audit regime, this
concern is unfounded. The centralized partnership audit regime does not
apply to taxable years beginning prior to January 1, 2018, for which an
election under Sec. 301.9100-22 was not made. If the centralized
partnership audit regime does not apply to a partnership for a
particular taxable year, then these regulations, which clarify the
application of the centralized partnership audit regime, are irrelevant
to the examination of that particular partnership's taxable year.
As previously noted, the comment also expressed concern that the
applicability of the regulations could apply to taxable years prior to
the date the November 2020 NPRM was filed with the Federal Register as
the regulations were proposed to be applicable to any examinations or
investigations beginning after November 20, 2020, the date the November
2020 NPRM was filed with the Federal Register. This Treasury decision
adopts this comment. Accordingly, the applicability dates have been
modified to remove the provision that applied the regulations to
examinations or investigations beginning after November 20, 2020, and
to clarify that the final regulations apply to taxable years ending on
or after November 20, 2020, or taxable years beginning after December
20, 2018, in the case of the final regulations in Sec. 301.6241-7(b).
In the November 2020 NPRM, the applicability date in proposed Sec.
301.6241-7(j)(1) provided that the IRS and a partner under examination
could agree to apply any provision (except Sec. 301.6241-7(b)) to
taxable years prior to the general applicability date. The Treasury
Department and the IRS have decided that partnerships should also have
the flexibility to agree to apply Sec. 301.6241-7(g) (chapter 1 taxes
and penalties that are the liability of the partnership) prior to the
general applicability date as well. This may be especially beneficial
for partnerships in situations where the IRS proposes to reduce a
chapter 1 tax or penalty reported by the partnership. Accordingly,
Sec. 301.6241-7(j)(1) is updated to provide that the IRS and the
partnership may agree to apply Sec. 301.6241-7(g) for taxable years
ending prior to November 20, 2020, provided that taxable year is
otherwise subject to the centralized partnership audit regime.
2. Adjustments to Non-Income Items
A. Taking Into Account Adjustments to Non-Income Items That Are
Adjustments That Do Not Result in an Imputed Underpayment
Under section 6241(2)(B) and Sec. 301.6241-1(a)(6)(ii), the term
``partnership-related item'' includes items or amounts ``relating to
any transaction with, basis in, or liability of the partnership.''
Accordingly, the definition of ``partnership-related item'' includes
items that are not items of income, gain, loss, deduction, or credit
(non-income items). As defined in Sec. 301.6225-1(d)(2)(iii) prior to
the November 2020 NPRM, a positive adjustment is any adjustment that is
not a negative adjustment as defined in Sec. 301.6225-1(d)(2)(ii). A
negative adjustment is any adjustment that is a decrease in an item of
income (or treated as a decrease in an item of income), or an increase
to an item of credit. An adjustment to an item that is
[[Page 75476]]
a non-income item is not a decrease in an item of income. Therefore,
adjustments to a partnership's non-income items are always positive
adjustments, are never negative adjustments, and are not netted against
any adjustments to a partnership's items of income, gain, loss,
deduction, or credit under section 702(a). Therefore, adjustments to a
partnership's non-income items are adjustments that do not result in an
imputed underpayment in situations where a net negative adjustment to a
credit, or an item treated as a credit, reduces the imputed
underpayment to zero or less than zero. Under proposed Sec. 301.6225-
3(b)(8), if an adjustment to a non-income item is an adjustment that
does not result in an imputed underpayment, the partnership takes this
adjustment into account on its adjustment-year return by adjusting the
non-income item consistently with the adjustment, to the extent the
non-income item appears on the adjustment-year return without regard to
the adjustment.
Two comments were received regarding the rules for taking into
account adjustments to non-income items in the partnership's adjustment
year in situations where the adjustments to non-income items are
adjustments that do not result in an imputed underpayment under
proposed Sec. 301.6225-3(b)(8). Both comments expressed concern that
including an adjustment to a non-income item, such as an asset, in the
imputed underpayment could result in recognition of gain, in the form
of the imputed underpayment on the adjustment, prior to the disposition
of the asset. One comment also expressed concern that it could result
in double tax in situations where a non-income item is adjusted at the
partnership level under the centralized partnership audit regime and at
the partner level in situations where a special enforcement provision
is utilized. According to the comment, the double tax would occur
because the partner would pay tax on the adjustment in the partner-
level proceeding and the partnership would pay an imputed underpayment
on the same adjustment in a partnership examination. The comment noted
that it was unclear whether the partnership must also recognize gain on
that adjustment in addition to adjusting the non-income item on the
partnership's adjustment year return. One of the comments recommended
removing proposed Sec. 301.6225-3(b)(8) in its entirety. However, the
comment seemed to focus primarily on the inclusion of non-income items
in the calculation of the imputed underpayment, which is not something
that is the subject of proposed Sec. 301.6225-3(b)(8). Therefore, that
comment's concerns on that issue are addressed more fully in section
2.B of this preamble.
One of the comments also requested that the rule be clarified to
note that the partnership would not recognize gain in the adjustment
year as a result of taking into account the adjustment to the non-
income item that was an adjustment that did not result in an imputed
underpayment. Finally, one comment requested that cross-references in
the example be changed to refer to Sec. Sec. 301.6225-1(d) and (f) in
their entirety and requested additional examples illustrating how other
adjustments to non-income items are taken into account on the
adjustment year return.
With regard to the comment's concern about the potential for double
tax, if an item is adjusted both in an examination of the partnership
and of a partner, Sec. 301.6241-7(i) provides that an item will not be
adjusted at the partner level if the partner can demonstrate that the
adjustment was previously taken into account by the person in an
examination under the centralized partnership audit regime (for
example, by filing an amended return as part of a request to modify the
imputed underpayment). Also, an item will not be adjusted at the
partner level if the partner demonstrates that the adjustment was
included in an imputed underpayment paid by the partnership or pass-
through partner for a taxable year in which the partner was a reviewed
year partner but only to the extent the adjustment exceeds the original
amount reported by the partnership to the partner (that is, the partner
needs to have reported the original amounts from the partnership
first). In addition, if the partner-level proceeding concludes prior to
the partnership-level proceeding, the partnership may request
modification of the imputed underpayment for any adjustment previously
taken into account at the partner level. Accordingly, in situations
where an item is adjusted both in a partner-level examination and a
partnership-level examination, the adjustments will not result in
double tax because these rules provide for the exclusion of any
potential double tax in the examination that concludes later.
The comments also had concerns about gain recognition as a result
of adjusting the non-income item in the adjustment year when the
adjustment is an adjustment that does not result in an imputed
underpayment. There is nothing in the centralized partnership audit
regime that would require the partnership to recognize gain in the
adjustment year when the partnership adjusts a non-income item as a
result of taking into account adjustments that do not result in an
imputed underpayment.
Proposed Sec. 301.6225-3(b)(8) provides that the partnership takes
an adjustment to a non-income item into account by adjusting the non-
income item on its adjustment year return. As the example in proposed
Sec. 301.6225-3(d)(3) demonstrated, in the case of an adjustment to
the basis of an asset, the partnership would adjust its basis in the
asset in the adjustment year. To avoid confusion, the example has been
modified to clarify that the reduction in the basis of the asset only
requires the partnership to recognize income or gain in situations
where income and gain would be recognized. One comment also requested
additional examples demonstrating how adjustments to other items such
as liabilities and capital account adjustments are taken into account.
In response to the comment, Example 4 is added to Sec. 301.6225-3(d)
to demonstrate how adjustments to liabilities are taken into account
when they are adjustments that do not result in an imputed
underpayment. Another example, Example 5, is also added to Sec.
301.6225-3(d) in response to the public comment to demonstrate how
filing an amended return as part of modification applies when there are
adjustments to non-income items. In addition, the recommendation that
the cross-references in the example be modified is also adopted and the
cross-references are changed where they appear in the example.
One comment expressed concern about how partnerships would be able
to comply with proposed Sec. 301.6225-3(b)(8) when filing their
adjustment year returns. The comment noted that partnerships have
different software, advisors, and levels of sophistication and,
therefore, the rule might not be consistently applied among
partnerships. The comment expressed a concern that proposed Sec.
301.6225-3(b)(8) does not provide a clear and administrable standard as
to when to include a non-income item adjustment on the partnership's
adjustment year return. The comment expressed concern that taking into
account adjustments to non-income items on the partnership's adjustment
year return could preclude items that otherwise could never be reported
and provided examples of items under section 199A.
Proposed Sec. 301.6225-3(b)(8) endeavors to provide clear, bright-
line rules on how to account for adjustments to non-income items that
must be taken
[[Page 75477]]
into account on the partnership's adjustment year return because they
did not result in an imputed underpayment. Proposed Sec. 301.6225-
3(b)(8) provides rules on what to do if the non-income item is still
included on the partnership's adjustment year return and rules for what
happens if it is not included, as well as an example of how the rule
works. The nature of non-income items precludes a regulation that could
individually account for all types of non-income items because non-
income items by their definition vary widely. To encompass all the
types of non-income items that could be adjusted in the centralized
partnership audit regime, it is necessary for the rule to be broad and
apply to numerous types of non-income items. Although the Treasury
Department and the IRS take seriously concerns regarding inconsistent
application of provisions, varying levels of sophistication, and
differences in interpretation of statutes or regulations by software or
advisors, proposed Sec. 301.6225-3(b)(8) provides necessary guidance
to taxpayers while appropriately balancing administrability concerns.
The comment about whether proposed Sec. 301.6225-3(b)(8) would
preclude the reporting of some items is unclear. If an adjustment is an
adjustment that does not result in an imputed underpayment, it is
required to be taken into account on the partnership's adjustment year
return under section 6225(a)(2). Therefore, those adjustments are
accounted for on the adjustment year return.
As non-income items are required to be included in the calculation
of the imputed underpayment, there must be rules regarding how to take
those adjustments into account on the adjustment year return if they
are adjustments that do not result in an imputed underpayment. Without
the rule contained in proposed Sec. 301.6225-3(b)(8), partnerships
would be left with no guidance as to how or when to take those
adjustments into account. For this reason and for all the previous
reasons, the recommendation to remove proposed Sec. 301.6225-3(b)(8)
is not adopted.
One comment requested an example demonstrating how adjustments to
capital accounts are taken into account if they are adjustments that do
not result in an imputed underpayment. These regulations do not address
any effect on partner basis and capital accounts. As a result, the
comment is beyond the scope of these regulations.
B. Adjustments to Non-Income Items in the Calculation of the Imputed
Underpayment
Section 6225 provides specific rules on how to compute the imputed
underpayment, which is a liability of the partnership. Under section
6225(b), if adjustments are made to a partnership-related item, those
adjustments are appropriately netted, and the highest rate under
section 1 or 11 is applied as part of the calculation of the imputed
underpayment. Non-income items are included in the definition of
``partnership-related item.'' See section 6241(2)(B)(i) (noting that a
partnership-related item includes any item or amount relating to
liabilities of the partnership); Sec. 301.6241-1(a)(6)(v)(C), (D), and
(E). Accordingly, as non-income items are partnership-related items,
adjustments to non-income items are appropriately included in the
calculation of the imputed underpayment as section 6225 does not limit
which adjustments to partnership-related items are included in the
calculation.
The November 2020 NPRM did not propose any changes to the
definition of positive adjustments in Sec. 301.6225-1(d)(2)(iii), to
the formula for calculating the imputed underpayment under Sec.
301.6225-1(b), or to Sec. 301.6225-1(a)(1), which provides that all
adjustments to partnership-related items are included in the
calculation of the imputed underpayment. In addition, no changes were
proposed to the definition of partnership-related item in Sec.
301.6241-1(a)(6)(ii), which includes examples of non-income items as
partnership-related items. Accordingly, comments regarding whether a
non-income item should be included in the calculation of the imputed
underpayment are outside the scope of this regulation and any changes
to those provisions would need to be proposed in a separate NPRM.
However, the Treasury Department and the IRS have attempted to respond
to the comments on this issue within the scope of the November 2020
NPRM.
Two comments were received on the inclusion of non-income items in
the calculation of the imputed underpayment. Both comments recommended
that all adjustments to non-income items should not be taken into
account in determining whether there is an imputed underpayment or that
the adjustment to the non-income items should be treated as zero in the
computation.
One comment expressed a concern that including adjustments to non-
income items in the calculation of the imputed underpayment would fail
to reflect accurately the tax impacts of the adjustments and that the
imputed underpayment could be far greater than the partners' aggregate
chapter 1 tax liability, which the comment said the imputed
underpayment is intended to approximate. The comment said this
discrepancy would discourage partnerships from filing administrative
adjustment requests (AARs) especially given that more and more items
are being reported by partnerships. The comment expressed concern that
the ability to push out the adjustments under section 6226 does not
mitigate or alleviate these concerns.
Both comments expressed concern that an adjustment to a non-income
item, such as an adjustment to the basis of an asset, could give rise
to a taxable adjustment without a corresponding disposition,
realization, or recognition event upon which gain or loss would be
determined. One comment also had concerns that including an adjustment
to a non-income item in the imputed underpayment would effectively
require the partnership to recognize gain prior to when the partnership
would otherwise be required to recognize gain under the Code. One
comment stated that there is nothing in the Code or in the legislative
history of the centralized partnership audit regime that would indicate
Congress intended that the IRS could cause a recognition event where
one had not occurred. The Treasury Department and the IRS note that
there is no legislative history of subchapter C of chapter 63 but agree
that there is nothing in subchapter C of chapter 63 that specifically
mentions recognition events. However, as discussed later, under the
centralized partnership audit regime, the inclusion of an adjustment to
a non-income item in an imputed underpayment is not, and does not
require, a recognition event.
With regard to the comment that the tax is paid early on non-income
items, the comment is correct that, by paying an imputed underpayment
on an adjustment to a non-income item, in some circumstances the
partnership will effectively pay a tax on the change in the non-income
item in situations where the partnership would not yet have recognized
income aside from the partnership examination. Under section 6225, the
partnership is liable for an imputed underpayment on any adjustments to
partnership-related items, which is defined under section 6241 as any
item with respect to the partnership that is relevant to determining
the tax liability of any person under chapter 1 of the Code, including
a liability of the partnership.
[[Page 75478]]
Accordingly, the imputed underpayment under the centralized
partnership audit regime is not designed to be the exact amount of the
tax liability that would have been paid by the partners, nor is it a
substitute for partner tax liability. Rather, it is an entity-level
liability of the partnership alone computed by reference to any
adjustments made to partnership-related items, regardless of whether
those adjustments would have actually resulted in a tax liability to
any particular partner. Therefore, given that adjustments are made to a
specific taxable year, the adjustments could result in an imputed
underpayment in situations where no income would have been recognized
if the item had been correctly reported originally. But the adjustments
and the imputed underpayment are not themselves realization or
recognition events; they are adjustments to partnership-related items
that are taken into account in calculating an imputed underpayment
under the centralized partnership audit regime.
To provide the partnership with an opportunity to mitigate any
inconsistency that may result with the computation of the imputed
underpayment, the partnership can request to modify the imputed
underpayment or may elect to push out the adjustments to its reviewed
year partners. When taking into account an adjustment to a non-income
item as part of filing of an amended return or calculating the
additional reporting year tax under section 6226, an adjustment to a
non-income item would only result in additional tax if that adjustment
would have resulted in additional tax on the partner's original tax
return had the item been correctly reported by the partnership on its
original return for the reviewed year or any intervening year. For
example, assume the basis in an asset was adjusted and, subsequent to
the reviewed year but prior to the adjustment year, a partner received
that asset in a distribution and disposed of that asset. In that case,
an adjustment to the partnership's basis in an asset may affect the
amount of tax the partner would have paid if the item had been
correctly reported. As a result, in this example, the additional
reporting year tax for that partner likely would be affected by the
basis adjustment.
As mentioned previously, two comments requested that adjustments to
non-income items be excluded from the calculation of the imputed
underpayment or that those adjustments be treated as zero. As
previously discussed, the imputed underpayment is an entity-level
liability calculated on all of the adjustments to partnership-related
items, and the highest rate is applied regardless of what the tax
consequences would have been had the partners correctly taken into
account the adjustments in the reviewed year. As a result, in some
instances the centralized partnership audit regime shifts an
adjustment, and its tax consequences, into a different year than the
year to which the adjustment relates. For example, adjustments that do
not result in an imputed underpayment are taken into account in the
adjustment year instead of the reviewed year. In other words, there are
many aspects of the centralized partnership audit regime enacted by
Congress that result in income, gain, loss, deduction, or credit, and
any taxes on those items, being recognized or taken into account in
taxable years other than in the taxable year where the item would have
been reported if the centralized partnership audit regime did not
apply.
To alleviate this difference, the centralized partnership audit
regime offers partnerships choices that would modify or eliminate the
imputed underpayment and would make the underpayment amount closer to
the amount of tax that would have been paid if the partners had
reported the proper amounts of items in the correct taxable year. For
example, the partnership may request modification of the imputed
underpayment, including modification of any adjustments that do not
result in an imputed underpayment, or may elect to push out the
adjustments to its reviewed year partners under section 6226. In
addition, Sec. 301.6225-1(b)(4) provides that the IRS and partnerships
may treat an adjustment as zero solely for purposes of calculating the
imputed underpayment in situations where multiple positive adjustments
are related to, or result from, one another. Therefore, the
recommendation to remove adjustments of non-income items from the
calculation of the imputed underpayment or to treat those adjustments
as zero in calculating the imputed underpayment in all situations is
not adopted.
In addition to the comments on the inclusion of non-income items in
the calculation of the imputed underpayment, one comment was received
on proposed Sec. 301.6225-1(b)(4), which provides the rules for
treating an adjustment as zero solely for purposes of computing the
imputed underpayment in certain situations. The comment recommended
extending the rule in proposed Sec. 301.6225-1(b)(4), that allows one
adjustment to be treated as zero solely for purposes of calculating the
imputed underpayment, if the adjustment is related to or results from
an adjustment to an item of income, gain, loss, deduction, or credit to
persons other than the IRS. As stated in the preamble to the November
2020 NPRM, the sentence added to Sec. 301.6225-1(b)(4) that provides
that a partnership may treat an adjustment to a non-income item as zero
for purposes of computing the imputed underpayment was proposed to be
expanded to provide for a broader application, including to allow
partnerships to utilize this rule.
In response to the comment that the language is unclear, the
language of proposed Sec. 301.6225-1(b)(4) is modified to clarify that
this provision applies to both the IRS and partnerships, and the rule
has been broadened further. As modified, Sec. 301.6225-1(b)(4) as set
forth in this Treasury decision provides that if any positive
adjustment is related to, or results from, a second positive
adjustment, a partnership may treat one of the positive adjustments as
zero solely for purposes of computing the imputed underpayment unless
the IRS determines that the adjustment should not be treated as zero.
With this change, a partnership may treat an adjustment to a non-income
item as zero if the adjustment to the non-income item is related to, or
results from, another adjustment to a non-income item. However, this
rule does not allow the partnership to treat an adjustment as zero if
one adjustment is positive and one is negative. For example, if a
partnership changes an ordinary loss to a capital loss, which results
in a positive adjustment to ordinary income and a negative adjustment
to capital loss, the partnership could not treat the negative
adjustment to capital loss as zero for purposes of calculating the
imputed underpayment. This change provides more relief to partnerships
and more closely aligns with the intended purpose of this rule.
One comment recommended that the phrase ``unless the IRS determines
that the adjustment should be included in the imputed underpayment'' be
removed from Sec. 301.6225-1(b)(4). It is unclear whether this
recommendation was made to provide clarity that the provision also
applied to determinations made by partnerships or if this
recommendation was in addition to that comment. To the extent the
comment was about clarifying that Sec. 301.6225-1(b)(4) applied to
determinations made by partnerships as well as the IRS, as discussed
previously, additional language has been added to the provision to make
this clear. To the extent that this comment is an additional
recommendation, the
[[Page 75479]]
comment is not adopted. Because partnerships may treat an adjustment as
zero for purposes of calculating the imputed underpayment, there may be
times when the partnership should not have treated the adjustment as
zero. Accordingly, the IRS needs to be able to determine that the
partnership's calculation is accurate.
The comment also requested that a cross-reference to Sec.
301.6225-1(b)(4) be added to the regulations under section 6227 to
clarify that the provision may be used in AARs. Section 301.6227-
2(a)(1) provides that the calculation of an imputed underpayment as
part of the filing of an AAR is done in accordance with Sec. 301.6225-
1, which would include Sec. 301.6225-1(b)(4). Therefore, additional
clarification is not needed and adding a cross-reference to one portion
of the entire regulation that is cited may cause confusion regarding
whether the other provisions in Sec. 301.6225-1 are applicable.
One comment recommended that if the partnership did not include any
adjustments to non-income items in calculating an imputed underpayment
as part of an AAR, the rule should provide that the partnership will
not be subject to penalty. Nothing in the centralized partnership audit
regime prohibits a partnership from raising a defense (such as
reasonable cause) to an asserted penalty if that penalty is subject to
such a defense. However, if partnerships would never be subject to a
penalty for failing to include adjustments to non-income items in the
calculation of the imputed underpayment, this would discourage
partnerships from including non-income items in the calculation as
there would not be a penalty for the IRS to utilize to enforce correct
reporting of partnership-related items. The penalty incentivizes proper
reporting and removing the penalty's application here would negatively
affect tax compliance. Therefore, this comment is not adopted.
In addition, one comment also recommended that any adjustment to a
non-income item that affects the basis of partnership assets should be
included under the rules of proposed Sec. 301.6225-4 and not under the
provisions of computing the imputed underpayment on adjustments to
partnership-related items. This comment is not adopted. Section
301.6225-1 provides rules for the calculation of the imputed
underpayment. Adjustments to a partnership's reporting of its non-
income items on its return are included within the calculation of the
imputed underpayment as are all adjustments to partnership-related
items. Accordingly, Sec. 301.6225-1, and not proposed Sec. 301.6225-
4, is the proper location for rules governing the calculation of the
imputed underpayment.
Finally, one comment recommended removing Sec. 301.6225-
1(d)(2)(iii)(B), which provides that an adjustment that cannot be
allocated under section 704(b) is treated as a positive adjustment or a
credit, as appropriate, if the adjustment could result in an increase
in an item of income, gain, loss, deduction, or credit. The comment
stated that this rule also addresses the same issue as Sec. 301.6225-
1(b)(4), which provides that an adjustment may be treated as zero for
purposes of calculating the imputed underpayment if that adjustment is
included within another adjustment and it would not be appropriate to
include both adjustments in the calculation. The comment stated that
both address adjustments to non-income items that are taken into
account in calculating the imputed underpayment and, therefore, Sec.
301.6225-1(d)(2)(iii)(B) is duplicative. Although the comment noted
that it is duplicative, the comment recommended that this provision be
amended to provide that items that cannot be allocated under section
704(b) are not taken into account in computing the imputed
underpayment.
As previously mentioned, comments requesting that non-income items
be excluded completely (or always treated as zero) from the calculation
of the imputed underpayment are not adopted. Section 301.6225-
1(d)(2)(iii)(B) does not serve the same purpose as Sec. 301.6225-
1(b)(4). Section 301.6225-1(d)(2)(iii)(B) provides that adjustments to
items that are not allocated under section 704(b) are treated as
positive adjustments or credits, whichever is appropriate. Section
301.6225-1(b)(4) provides that adjustments may be treated as zero
solely for purposes of calculating the imputed underpayment if that
adjustment is related to, or results from, another adjustment. Section
301.6225-1(b)(4) does not apply to adjustments that are not related to,
or result from, another adjustment and, after amendment, it applies to
all positive adjustments, not just those that are not allocated under
section 704(b). Therefore, Sec. 301.6225-1(d)(2)(iii)(B) and Sec.
301.6225-1(b)(4) are not duplicative. Even though those provisions are
not duplicative, the Treasury Department and the IRS agree that Sec.
301.6225-1(d)(2)(iii)(B) is duplicative of concepts in other
provisions, such as the definition of positive adjustment. Accordingly,
the comment recommending removing Sec. 301.6225-1(d)(2)(iii)(B) is
adopted. Because Sec. 301.6225-1(d)(2)(iii)(B) is removed in these
regulations, former Sec. 301.6225-1(d)(2)(iii)(A) is renumbered to be
Sec. 301.6225-1(d)(2)(iii). No changes were made to the content of the
paragraph.
3. Cease To Exist
One comment was received on the proposed changes to Sec. 301.6241-
3. That section provides rules implementing section 6241(7), which
authorizes the Secretary of the Treasury or her delegate (Secretary) to
prescribe rules for situations where a partnership (or partnership-
partner) has ceased to exist prior to a partnership adjustment taking
effect.
A. Guidance Under Section 6232(f)
The comment recommended not finalizing any of the proposed changes
to Sec. 301.6241-3 until the IRS issues guidance under section
6232(f), which provides rules for the IRS to assess amounts due to
failure to pay imputed underpayments. The comment reasoned that
guidance under section 6232(f) will provide insight into how the
provisions under Sec. 301.6241-3 should be coordinated with section
6232(f). As an alternative, the comment recommended not finalizing the
proposed changes to Sec. 301.6241-3(c), which provides when
partnership adjustments take effect. The comment is not clear as to why
the proposed changes to when partnership adjustments take effect causes
concern. The comment noted that if the proposed changes were finalized,
partnerships would be subject to the discretion of the IRS not only as
to whether the partnership has ceased to exist but also when the
adjustments take effect.
As stated in the preamble to the November 2020 NPRM, some of the
proposed changes to Sec. 301.6241-3 are needed so that the rules
implementing section 6241(7) do not prevent the IRS from using its
assessment power under section 6232(f). Unlike some other provisions in
the centralized partnership audit regime that require regulations or
other guidance to be effective, section 6232(f) is self-executing and
does not require the IRS to issue guidance before the provision may be
used. Section 6241(7) provides that if a partnership ceases to exist
prior to the partnership adjustments taking effect, then the former
partners are to take into account the adjustments under regulations
prescribed by the Secretary.
Accordingly, as written, section 6241(7) requires its application
if its conditions are met. Prior to proposed amendment, Sec. 301.6241-
3 provided that adjustments did not take effect until the partnership
fully paid all amounts due under the centralized partnership audit
regime but no later than the expiration of the collections period of
limitations.
[[Page 75480]]
Therefore, if the IRS determined that a partnership ceased to exist,
section 6241(7) would be the only provision that could be used,
precluding the use of section 6232(f). There is no reason why the IRS
should be prevented from using the self-executing rules of section
6232(f) prior to the issuance of guidance under section 6232(f).
Therefore, this comment is not adopted.
B. When Adjustments Take Effect
As previously mentioned, the comment recommended that the proposed
changes to when partnership adjustments take effect not be finalized.
The proposed change is needed to allow the IRS to utilize section
6232(f) and not be foreclosed from doing so by section 6241(7) in
situations where the partnership has ceased to exist.
The comment seemed to express concern that the revised definition
would give the IRS greater discretion over which provision would apply
and that, as a result, the changes should not be finalized. As stated
earlier, the November 2020 NPRM proposed to change when partnership
adjustments take effect from when the partnership has fully paid any
amounts due under the centralized partnership audit regime to when the
IRS and the partnership enter into a settlement agreement, when an AAR
is filed, or if the adjustments become finally determined under Sec.
301.6226-2(b)(1), which is when a court decision becomes final or when
the notice of final partnership adjustment (FPA) is mailed if no
petition is filed under section 6234.
This change does not provide the IRS with more discretion as the
IRS has limited control over when the adjustments take effect. Although
the comment seems to presume that a partnership has complete control
over when it pays all of the amounts due, if the IRS is utilizing
collection tools such as a levy, the balance due could become fully
paid outside of the partnership's control. Likewise, although the IRS
has some control over when it mails an FPA (influenced in part by
whether a partnership agrees to an extension of the period of
limitations under section 6235), the IRS has no control over whether
the partnership files a petition in response to the FPA, when a court
decision becomes final, when the partnership files an AAR, or if the
partnership enters into a settlement with the IRS. Therefore, because
Sec. 301.6241-3 of the final regulations should not create a situation
where it precludes the IRS from utilizing section 6232(f) by providing
that adjustments do not take effect until the amount due from those
adjustments is paid, the comment is not adopted.
C. Currently Not Collectible
Under proposed Sec. 301.6241-3(b), a partnership ceases to exist
if the IRS determines that the partnership terminates under section
708(b)(1) or the partnership does not have the ability to pay, in full,
any amount that may be due under the centralized partnership audit
regime. It further provides that if a partnership's account is
``currently not collectible'' according to IRS records, then it is
deemed to not have the ability to pay in full. Previously a partnership
was considered to have ceased to exist if the IRS determined that the
partnership terminated under section 708(b)(1) or the partnership does
not have the ability to pay in full under the centralized partnership
audit regime. If a partnership is ``currently not collectible,'' it
does not have the ability to pay in full, which is why the amendment to
Sec. 301.6241-3(b) was proposed.
The comment recommended that a definition of ``currently not
collectible,'' which is used as part of the definition of when a
partnership may cease to exist, be added to Sec. 301.6241-7 so that
partnerships will have clear notice of when the IRS would make a
determination that the partnership has ceased to exist under this
provision. The comment noted that ``currently not collectible'' is a
term of art used by the IRS and that the Internal Revenue Manual (IRM)
sets forth procedures to determine if a taxpayer is ``currently not
collectible.''
As an initial matter, the Treasury Department and the IRS note
that, under Sec. 301.6241-3(b), a partnership may not have the ability
to pay in full but not be ``currently not collectible.'' As provided in
Sec. 301.6241-3(b), if the IRS has determined a partnership is
``currently not collectible'' then it will be deemed not to have the
ability to pay in full. The comment is correct that the term
``currently not collectible'' is a term of art used by the IRS. The
proposed change to the definition of cease to exist under Sec.
301.6241-3(b)(1) to use the term ``currently not collectible'' is
intended to be the same as ``currently not collectible'' already in use
by the IRS in other contexts. The centralized partnership audit regime
concerns the making of adjustments to partnership-related items and is,
therefore, not the proper place for new rules regarding collectability
generally. As the comment correctly noted, there is an entire section
in the IRM that provides standards and procedures for determining
whether a taxpayer is ``currently not collectible.'' These procedures
have been in place for several years and provide a familiar and well-
known standard for both the IRS and taxpayers. Having multiple
standards or definitions for whether a taxpayer is ``currently not
collectible'' would result in uncertainty for the IRS and taxpayers.
Therefore, this comment is not adopted.
D. Coordination With Elections Under Section 6226, Requests for
Modification, and Payment of the Imputed Underpayment
As previously stated, section 6241(7) provides that if a
partnership ceases to exist prior to when any adjustments take effect,
the former partners of the partnership must take into account the
adjustments under regulations prescribed by the Secretary. One comment
expressed concern that it was unclear whether a partnership that has
ceased to exist may make an election to push out the adjustments under
section 6226, request modification of the imputed underpayment under
section 6225(c), or pay the imputed underpayment instead of the former
partners taking the adjustments into account using the rules in Sec.
301.6241-3. The comment expressed concern that the IRS could determine
a partnership ceased to exist prior to the partnership having an
opportunity to utilize any of these provisions and that may prevent the
partnership from utilizing any provisions. The comment recommended that
the rule be clarified to provide that a partnership may make an
election to push out the adjustments under section 6226, request
modification of the imputed underpayment under section 6225(c), or pay
the imputed underpayment even if the partnership has ceased to exist.
This comment is adopted for the following reasons.
The rules implementing section 6241(7) were never intended to
prevent a partnership from making an election to push out the
adjustments under section 6226, requesting modification of the imputed
underpayment under section 6225(c), or paying the imputed underpayment.
Section 6241(7) is a tool the IRS may use in situations where it is
unclear whether the partnership will be able to pay any amounts due
resulting from the partnership adjustments to protect the ability to
collect tax due as a result of the partnership adjustments. Therefore,
it is not intended to prevent a partnership from reducing or fully
paying its liability or shifting the liability to its former partners
as it could if it had not ceased to exist. In addition, one of the two
criteria for determining whether a
[[Page 75481]]
partnership has ceased to exist is that the partnership does not have
the ability to fully pay any amounts due under the centralized
partnership audit regime. If the partnership has the ability to fully
pay all amounts due, the partnership would not have ceased to exist
under that criteria.
In response to the comment, a sentence is added to the end of Sec.
301.6241-3(a)(1), which provides that a determination that a
partnership has ceased to exist does not prohibit the partnership from
requesting to modify the imputed underpayment under section 6225(c).
The ability to request modification of the imputed underpayment is not
dependent on whether the partnership is paying the imputed underpayment
or will elect to push out the adjustments to its partners and,
therefore, is not dependent on whether the former partners must take
into account the adjustments.
In addition, in response to the comment, a sentence is added to the
end of Sec. 301.6241-3(b)(3), which provides for limitations on the
IRS's ability to determine that a partnership has ceased to exist. The
new sentence provides that a determination that a partnership has
ceased to exist is not effective if the partnership has made a valid
election under section 6226 to push out the adjustments or has fully
paid all amounts due under the centralized partnership audit regime
within ten days of notice and demand for payment. This addition
protects the IRS's ability to utilize the rules under section 6241(7)
while still clarifying that a partnership may make an election under
section 6226 or pay the imputed underpayment and any applicable
penalties and interest.
E. Former Partners
Under proposed Sec. 301.6241-3(d), the former partners of a
partnership are the partners from the last taxable year for which the
partnership filed a return under section 6031, the partners from any
AAR filed by the partnership, or the partners from a final
determination that is binding on the partnership. Prior to the proposed
changes, the former partners of the partnership were the partners
during the adjustment year or, if there are no adjustment year
partners, the partners of the partnership during the last taxable year
for which the partnership filed a return under section 6031.
The comment recommended that the proposed changes to the definition
of ``former partners'' under Sec. 301.6241-3(d) should not be made as
the proposed change to the definition was related to the change to the
determination of when the adjustments take effect, which the comment
previously recommended not be made. Although, as stated in section 3.B
of this preamble, the comment to retain the existing definition of when
partnership adjustments take effect is not adopted, the Treasury
Department and the IRS have decided not to finalize the proposed
changes to Sec. 301.6241-3(d).
4. Comments on the Special Enforcement Provisions
Three comments were received on several of the provisions proposed
under Sec. 301.6241-7 that implement section 6241(11) regarding the
treatment of special enforcement matters. A comment was made regarding
whether these rules were consistent with the purpose of the centralized
partnership audit regime's clear directive that adjustments to
partnership-related items be adjusted at the partnership level, not in
a partner examination, and that any departure from that directive
should be narrow and only exist where there is clear justification for
the departure. Two comments suggested that the centralized partnership
audit regime, including section 6235, does not suggest that the period
of limitations at the partner level impacts the ability of the IRS to
make adjustments to partnership-related items and that no extensions of
the period of limitations should be made outside of those expressly
provided by Congress in section 6235.
Under section 6241(11), Congress prescribed that in the case of
partnership-related items that involve special enforcement matters, the
Secretary may prescribe regulations providing that the centralized
partnership audit regime does not apply to those partnership-related
items and that those items are subject to special rules for assessment
and collection as the Secretary determines to be necessary for the
effective and efficient enforcement of the Code. Integral to the
concept that the Secretary can determine that the centralized
partnership audit regime (or portions of it) does not apply to certain
partnership-related items is the ability to adjust those partnership-
related items outside of the centralized partnership audit regime.
Additionally, inherent in the ability to subject items to special
rules for assessment and collection is the ability to prescribe rules
for assessment that differ from existing rules, including section 6235.
If the centralized partnership audit regime does not apply to an item
then that item may only be adjusted using the rules that apply to
partnerships that have made an election out of the centralized
partnership audit regime and not using any of the rules contained in
subchapter C of chapter 63. For example, if the centralized partnership
audit regime does not apply to an item, the item could be adjusted on
the return of the partner and the section 6235 period of limitations
would not apply to that item. Instead, as for partnerships that have
elected out of the centralized partnership audit regime, the operative
period of limitations is the partners' period of limitations on making
assessments. Because section 6241(11) provides that the IRS may provide
that the centralized partnership audit regime does not apply to certain
items and that there are special rules for assessment and collection,
the IRS may prescribe special rules that impact or rely upon the
partners' periods of limitations on assessment.
Therefore, although the centralized partnership audit regime
provides that adjustments are made at the partnership level based on
the partnership's period of limitations, Congress, by enacting section
6241(11), contemplated that there would be times when the centralized
partnership audit rules did not apply. Accordingly, any special
enforcement provision that adjusts partnership-related items outside of
the centralized partnership audit regime or provides special rules
governing the period of limitations on assessment when items are
adjusted outside of the centralized partnership audit regime is not
inconsistent with Congress's intent. Rather, it is consistent with the
intent of Congress as expressly provided in section 6241(11).
A. Partnership-Related Items That Underlie Adjustments to Items That
Are Not Partnership-Related Items
Three comments were received on the proposed special enforcement
rule under Sec. 301.6241-7(b) that would allow the IRS to make
determinations regarding partnership-related items as part of an
adjustment to an item that is not a partnership-related item in
situations where the treatment of the partnership-related item on the
partnership return is based, in whole or in part, on information
provided by the person under examination. The rule in proposed Sec.
301.6241-7(b) was previewed in Notice 2019-06, which was made available
to the public on December 20, 2018. Although Notice 2019-06 requested
comments, no comments were received on this rule.
All comments recommended that proposed Sec. 301.6241-7(b) be
removed in its entirety. Two comments expressed concern that
adjustments made in a
[[Page 75482]]
partner examination could affect the other partners in the partnership
and the partnership itself. One comment stated that the proposed rule
appears to be inconsistent with Congress's intent that adjustments to
partnership-related items be determined at the partnership level. Two
comments stated that the proposed rule could be interpreted broadly to
encompass partners involved in the preparation of the return.
One comment stated that other provisions in the centralized
partnership audit regime already address the same issue as proposed
Sec. 301.6241-7(b). That comment stated that the ability for partners
to file an amended return during the modification process, the ability
for the partnership to elect to push out the adjustments, and the
ability to create a specific imputed underpayment for a single or small
group of partners makes proposed Sec. 301.6241-7(b) redundant and
unnecessary and, therefore, should be withdrawn. The comment stated
that these provisions already allow the IRS to make a partnership
adjustment that involves a single or limited number of partners. The
comment also stated that proposed Sec. 301.6241-7(b) is inconsistent
with the foundational principles of the centralized partnership audit
regime that provides the default rule that the partnership is liable
for any tax resulting from a partnership adjustment.
Under proposed Sec. 301.6241-7(b), the IRS may make determinations
regarding partnership-related items as part of an adjustment to an item
that is not a partnership-related item. Pursuant to this rule, the IRS
is making an adjustment to an item that is not a partnership-related
item. As part of making an adjustment to that item that is not a
partnership-related item, the IRS may make determinations about a
component of that item that is not a partnership-related item when that
component happens to be a partnership-related item. But the item
actually being adjusted on the partner's return is an item that is not
a partnership-related item. For example, this situation may arise when
a partner contributes an asset to the partnership in exchange for an
interest in the partnership and the partner then sells its interest in
the partnership. If the IRS disagrees with the amount of the partner's
contribution to the partnership, the adjustment the IRS actually makes
is to the partner's outside basis in its partnership interest and the
gain the partner reported on the sale of its partnership interest that
is reported on the partner's return. The IRS is not adjusting the
contribution to the partnership or the partnership's basis in the
contributed asset so, therefore, nothing on the partnership's return or
anything maintained in its books and records changes as a result of the
adjustment made to the partner's return.
Because the IRS is adjusting an item that is not a partnership-
related item during an examination of the partner, rules regarding the
creation of a specific imputed underpayment, a partner's filing of an
amended return during modification, or the partnership making an
election under section 6226 do not address the special enforcement
matter underlying proposed Sec. 301.6241-7(b). To utilize these
provisions, the IRS would have to remove the item that is not a
partnership-related item that is affected by partnership-related items
from the partner examination it currently has open. Then, the IRS would
have to open a separate examination of the partnership just to make an
adjustment to a partnership-related item (or portion thereof) the
reporting of which is based in whole or in part on information provided
by a specific partner or small group of partners who were already under
examination by the IRS. This is the exact inefficiency proposed Sec.
301.6241-7(b) was designed to alleviate.
As previously stated, section 6241(11) by its express terms
provides that rules may be created where the centralized partnership
audit regime (or portions of it) would not apply to partnership-related
items. Therefore, while there are foundational principles in the
centralized partnership audit regime, such as the default rule that a
partnership pays tax on partnership adjustments, section 6241(11)
expressly allows those foundational principles to be inapplicable for
special enforcement matters.
Although all comments recommended that the provision be removed in
its entirety, one recommended that if it is retained, the rule should
be limited to adjustments that would not impact the other partners at
all and another recommended that the applicability date of the rule not
be the date that Notice 2019-06 was issued and that the accompanying
example be modified.
Under proposed Sec. 301.6241-7(h)(2), determinations about
partnership-related items that are made outside of the centralized
partnership audit regime are not binding on any person who was not a
party to the proceeding. Accordingly, if none of the other partners or
the partnership become parties to the proceeding, no determination from
that proceeding is binding on them or would otherwise affect them. This
is similar in result to an examination of a partner in a partnership
that elected out of the centralized partnership audit regime. Although
the IRS may not make corresponding adjustments to the partnership's
items or to items of other partners not parties to the proceeding
without opening another proceeding, nothing prevents the partnership or
the other partners from taking any action to adjust those items.
To provide clarity in response to the comment, Sec. 301.6241-
7(h)(2) has been modified to clarify that the partnership and the other
partners are not bound to any determination regarding a partnership-
related item resulting from the partner-level examination and nothing
in Sec. 301.6241-7 requires the partnership or other partners to
adjust their returns. Section 301.6241-7(h)(2) has also been modified
to provide further explanation of how determinations regarding
partnership-related items outside of the centralized partnership audit
regime affect others who are not parties to the proceeding. Section
301.6241-7(h)(2) has been modified to provide an example illustrating
that if the partnership or any other partner does not become a party to
a partner level proceeding conducted due to the application of any of
the special enforcement rules (not just under Sec. 301.6241-7(b)) the
partnership and the other partners are not bound to any determinations
made in the partner-level proceeding. The example in Sec. 301.6241-
7(b)(2) has been updated accordingly and has also been modified to
provide clarity as to the items being adjusted in the example as a
result of comments made at the public hearing.
The Treasury Department and the IRS also note that Sec. 301.6241-
7(b) is very similar to Sec. 301.6222-1(c)(4), which provides rules
for conducting a partner-level proceeding if the partner notifies the
IRS of the partner's inconsistent treatment of partnership-related
items. Like Sec. 301.6241-7(b), Sec. 301.6221-1(c)(4)(ii) provides
rules for adjusting or determining partnership-related items in a
partner-level proceeding and provides that the IRS may adjust the
partnership-related item to be the correct treatment, even if that
treatment is different than the partnership's treatment of the
partnership-related item. As with Sec. 301.6241-7(b), Sec. 301.6222-
1(c)(4)(ii) provides that any final decision in that partner-level
proceeding is not binding on the partnership if the partnership was not
a party to the proceeding. The rule under Sec. 301.6241-7(b) is not
unique in the centralized partnership audit regime.
Accordingly, the comments have been adopted to the extent they
expressed
[[Page 75483]]
concern about the effect on the partnership and the other partners as a
result of determining partnership-related items as part of an
adjustment to an item that is not a partnership-related item at the
partner level. Nothing in these rules precludes the other partners or
the partnership from taking any action they deem necessary, including
requiring a partner to notify the partnership or the other partners of
any examination involving any of the special enforcement provisions.
As mentioned previously, the comments expressed concern that the
rule allowing the IRS to adjust partnership-related items outside of
the centralized partnership audit regime as part of an adjustment to an
item that is not a partnership-related item could be interpreted very
broadly and could apply to a wide variety of partnership-related items
and even to partners involved in the preparation of the partnership
return. It is unclear from the comments how the rule could be
interpreted broadly to apply to a wide variety of partnership-related
items and a wide variety of persons.
For this rule to apply, all of the following conditions must be
met: (1) a person other than the partnership must be under examination;
(2) the IRS must propose an adjustment to an item that is not a
partnership-related item; (3) a partnership-related item must be a
component of that item that is not a partnership-related item; (4)
determinations about that partnership-related item must be needed in
order to adjust the item that is not a partnership-related item; and
(5) the treatment on the partnership's return of the partnership-
related item that is the component of the item that is not a
partnership-related item being adjusted must be based, in whole or in
part, on information provided by the person under examination. The
information provided by the person under examination is that person's
information, not the partnership's information (that is, it is not
something maintained in the partnership's books and records). A partner
who prepares the partnership return would only be covered by this
provision if that partner were under examination based on the partner's
own tax return filings that required such adjustments, not based on the
fact that the partner prepared the return. A partner that provides all
of the information needed to prepare the partnership's return that is
the partnership's information (for example, its transactions) would not
be covered by the rule as the treatment on the partnership's return is
not based on information provided by the partner but is based on the
partnership's information. To avoid any confusion, in response to this
comment, Sec. 301.6241-7(b)(1)(iii) is modified to clarify that the
information provided by the partner that forms the basis of the
reporting by the partnership must come from the partner's own books and
records, not the books and records of the partnership.
Another comment recommended that if the rule is retained that the
provision be clarified. Specifically, the comment recommended that the
rule be clarified to provide: (1) when a determination regarding a
partnership-related item is ``part of'' or ``underlying'' an adjustment
to an item that is not a partnership-related item; (2) whether the
person described in proposed Sec. 301.6241-7(b)(1)(i) is the same
person as in proposed Sec. 301.6241-7(b)(1)(ii) and (iii); (3) whether
the determination regarding a partnership-related item occurs before or
after the IRS determines that the centralized partnership audit regime
does not apply to that partnership-related item; (4) a definition of
``non-partnership-related item''; and (5) in the example, whether some
of the facts are determinative of the outcome.
Regarding the comments about clarifying the meaning of ``part of''
and ``underlying,'' these terms do not have a special meaning for
purposes of the centralized partnership audit regime and should be read
using the ordinary meaning of those words. As these words do not have a
special meaning for purposes of the centralized partnership audit
regime, this comment is not adopted. With regard to defining ``non-
partnership-related item,'' the comment is adopted by removing the term
``non-partnership-related item.'' Instead, the final rules refer to
``items that are not partnership-related items'' when referring to
items that do not meet the definition of a partnership-related item.
Proposed Sec. 301.6241-7(b)(1)(i) provides that there must be an
examination of a person who is not the partnership. Proposed Sec.
301.6241-7(b)(1)(ii) and (iii) refer to ``the'' person whose return is
under examination and not ``a'' person who is under examination. No
other persons, other than the partnership, are referred to in proposed
Sec. 301.6241-7(b)(1). As there is only one person who is under
examination mentioned in proposed Sec. 301.6241-7(b)(1), it is the
same person in subparagraphs (i), (ii), and (iii) of proposed Sec.
301.6241-7(b)(1). As there is only one person under examination that is
mentioned, the provision has been clarified to prevent any confusion by
clarifying that the person described in Sec. 301.6241-7(b)(1)(ii) and
(iii) is the same person referred to in Sec. 301.6241-7(b)(1)(i).
Accordingly, the comment to clarify whether the person referred to in
proposed Sec. 301.6241-7(b)(1)(ii) is the same as the person referred
to in proposed Sec. 301.6241-7(b)(1)(iii), is adopted.
It is unclear what the concern is regarding the comment requesting
clarity about whether the determination regarding a partnership-related
item is made by the IRS before or after the IRS chooses to make other
determinations regarding that partnership-related item outside of the
centralized partnership audit regime. Before the IRS makes a
determination that a partnership-related item may be adjusted or
determined outside of the centralized partnership audit regime under
Sec. 301.6241-7, the general rule of section 6221 applies and
adjustments to partnership-related items must be made under the
centralized partnership audit regime. Therefore, a partnership-related
item cannot be adjusted or determined outside the centralized
partnership audit regime until after the IRS makes a determination
under Sec. 301.6241-7.
A decision to apply Sec. 301.6241-7 is in itself the determination
regarding whether adjustments to a partnership-related item may be made
outside of the centralized partnership audit regime. The decision under
Sec. 301.6241-7 does not itself make a determination regarding a
partnership-related item. If the IRS decides that a determination
should be made outside of the centralized partnership audit regime in
accordance with Sec. 301.6241-7, the IRS then makes the determination
as part of the partner's examination. Because additional clarification
is unnecessary the comment is not adopted.
With regard to whether some of the facts in the example are
determinative of the outcome, the facts that the comment mentions (no
liability or activity) are there to prevent confusion over whether the
partner's outside basis would have changed after the partner made the
initial contribution to the partnership in exchange for an interest in
the partnership. Accordingly, the facts are determinative not of the
rule being illustrated in the example but of the amounts used in the
example. Without those facts it could be unclear why the partner's
basis on June 9, 2019, is the same as it was on June 1, 2018.
The comment also asserts that ``the adjustment to the non-
partnership-related item results in the adjustment to the partnership-
related item.'' It is unclear what the comment is referring to. The
adjustment being made in the example is to an item that is not a
partnership-related item, which
[[Page 75484]]
therefore does not result in an adjustment to a partnership-related
item at the partnership level. The adjustment is being made at the
partner level during an examination of the partner and it is not
binding on the partnership in the same way that an adjustment to the
return of a partner in a partnership that was not subject to the
centralized partnership audit procedures would not be binding on that
partnership. However, the IRS is not precluded from commencing a
partnership examination to effect a consistent adjustment. As explained
previously in the preamble, no adjustment to a partnership-related item
on the partnership's return or in the partnership's books and records
is made when the IRS makes a determination regarding a partnership-
related item as part of an adjustment to an item that is not a
partnership-related item, including in a partner examination. In
proposed Sec. 301.6241-7(b), only adjustments to items that are not
partnership-related items are made. Nothing on the partnership's return
is changed when an adjustment in a partner examination to an item that
is not a partnership-related item is made under proposed Sec.
301.6241-7(b) even if the IRS adjusts the item that is not a
partnership-related item as if items on the partnership's return were
incorrect. Proposed Sec. 301.6241-7(b) applies only to situations
where the IRS is adjusting in a partner examination an item that is not
a partnership-related item and needs to determine a partnership-related
item to effectuate the overall adjustment to the item that is not a
partnership-related item. No other example in the regulations
implementing the centralized partnership audit regime states whether
each fact is determinative of the outcome, and it would cause more
confusion to note determinative facts only in this one example.
Therefore, the comment is not adopted. However, the term ``adjusted''
in proposed Sec. 301.6241-7(b) has been removed to alleviate any
confusion.
Finally, as mentioned previously, one comment recommended that the
effective date of Sec. 301.6241-7(b) should be the same as the other
special enforcement matters in the November 2020 NPRM and not be
applicable to tax years beginning after December 20, 2018, the date the
rule was previewed in Notice 2019-06. The comment noted that the period
of limitations on making adjustments to partnerships subject to the
centralized partnership audit regime has not yet expired for taxable
years beginning after December 20, 2018, and, therefore,
``retroactivity'' is unnecessary. As mentioned earlier, this rule was
previewed in Notice 2019-06 and no comments were received. Notice 2019-
06 stated that the Treasury Department and the IRS intended that the
rule, when proposed, would be applied with respect to taxable years
ending after December 20, 2018. Section 301.6241-7(b) is substantially
similar to the rule contained in Notice 2019-06. Therefore, this
recommendation is not adopted. In addition, whether the period of
limitations on making adjustments to partnerships subject to the
centralized partnership audit regime has not yet expired for taxable
years beginning after December 20, 2018, is not relevant to the
application of this rule. Under Sec. 301.6241-7(b), the IRS may
determine that the centralized partnership audit regime does not apply
to any determinations regarding partnership-related items in situations
described in Sec. 301.6241-7(b). Accordingly, as the IRS would be
determining that the centralized partnership audit regime does not
apply, it would be the partner's period of limitations on assessment
that would apply and not the partnership's period of limitations on
making adjustments.
B. Special Relationships and Extensions of the Partner's Period of
Limitations
Three comments were received on proposed Sec. 301.6241-7(f).
Proposed Sec. 301.6241-7(f) permits the IRS to determine that the
centralized partnership audit regime does not apply to adjustments to
partnership-related items in situations where the period of limitations
on making adjustments at the partnership level has expired but a
partner's period of limitations on assessment has not expired and that
partner has a relationship with the partnership that is described in
section 267(b) or 707(b). The proposed rule also applies if the partner
has expressly agreed, in writing, to extend the time to adjust and
assess any tax attributable to partnership-related items for the
taxable year.
The comments recommended removing proposed Sec. 301.6241-7(f) in
its entirety. One of the comments expressed concern about adjusting one
partner without considering how those adjustments would affect the
other partners in the partnership and noted that the rule unreasonably
overlaps with proposed Sec. 301.6241-7(b) as it would also apply to
managers and general partners who provide information to a partnership.
However, as noted in section 4.A of the preamble (discussing
partnership-related items that are components of adjustments to items
that are not partnership-related items), under Sec. 301.6241-7(h)(2),
an adjustment to a partnership-related item that occurs in a partner-
level proceeding is not binding on the partnership or the other
partners in the partnership unless they are also parties to the
proceeding and Sec. 301.6241-7(b) does not apply to situations
involving the partnership's own records. Accordingly, any adjustments
made under proposed Sec. 301.6241-7(f) would not bind the partnership
or the other partners.
That comment also expressed concern that proposed Sec. 301.6241-
7(f) does not define control as it does not state under what conditions
a partner could be considered to have control because sections 267(b)
and 707(b) do not use concepts of control through voting or management
rights. The comment concludes that control must be better defined to be
administrable for the IRS and predictable to taxpayers. Finally, the
comment noted that the concept of control is only referenced in
proposed Sec. 301.6241-7(f)(1). Therefore, the comment concludes,
proposed Sec. 301.6241-7(f) could be used to adjust any partnership-
related item of any direct or indirect partner that has an open period
of limitations or who agrees to extend their period of limitations.
Proposed Sec. 301.6241-7(f) provides that the IRS may adjust
partnership-related items outside of the centralized partnership audit
regime (that is, during a partner examination) if the period of
limitations on making partnership adjustments has expired for the
taxable year and one of two tests is met--(1) the partner meets the
requirements under section 707(b) or is related to the partnership
under section 267(b); or (2) the partner expressly agrees to extend the
time to adjust and assess tax attributable to partnership-related
items. While the comment stated that the applicability of the rule is
unclear because sections 267(b) and 707(b) do not use concepts of
control through voting or management rights, the comment does not
explain why voting or management rights should be the applicable test.
However, because of the confusion expressed by this comment, the non-
operative text of the heading of Sec. 301.6241-7(f)(1) has been
changed from ``controlled partnerships'' to ``special relationships''
to clarify that the provision is not about actual control of the
partnership but instead is solely focused on whether the partner is
related to the partnership under the generally applicable rules of
section 267(b) or 707(b). Under proposed Sec. 301.6241-7(f)(1), a
partner is covered by the rule if the partner bears a relationship to
the partnership described under section 267(b) or 707(b) without regard
to whether the partner
[[Page 75485]]
has control based on voting or management rights. This provision has
been slightly reworded for clarity in the final regulations, but the
rule has not changed. In addition, it is unclear how Sec. 301.6241-
7(f)(1) could be used to adjust any partnership-related item for any
direct or indirect partner. As stated previously, for the rule to apply
the partner must either be related to the partnership under section
267(b) or 707(b) or have expressly agreed to extend the time to adjust
and assess tax attributable to partnership-related items. Accordingly,
if a partner is not related to the partnership as described in section
267(b) or 707(b), the only way Sec. 301.6241-7(f) will apply to the
partner is if the partner expressly agrees in writing to the extension.
Two comments state that proposed Sec. 301.6241-7(f) appears to be
inconsistent with Congress's clear directive in the centralized
partnership audit regime to adjust partnership-related items and to
determine the period of limitations for partnership adjustments
exclusively at the partnership level and that the IRS should not extend
the period of limitations beyond what Congress has prescribed in
section 6235. However, as discussed more fully in the introduction to
section 4 of this preamble, Congress expressly provided that the
Secretary could prescribe rules under which the centralized partnership
audit regime (or any portion of it) would not apply to partnership-
related items. If the centralized partnership audit regime does not
apply to a partnership-related item, then the item or amount is not
adjusted or determined at the partnership level and the period of
limitations on making adjustments at the partnership level does not
apply to that adjustment or determination. Accordingly, Congress
expressly provided a means to make adjustments to or determinations
regarding partnership-related items and determine periods of
limitations at the partner level, and, therefore, Sec. 301.6241-7(f)
is consistent with congressional intent.
Two comments also expressly stated that the rationale for proposed
Sec. 301.6241-7(f) contained in the preamble to the November 2020 NPRM
is not that strong and does not warrant determining or extending the
period of limitations by regulation as the rule applies to all
partners, not merely those in tiered structures and is inconsistent
with congressional intent. As stated previously, the special
enforcement rules contained in Sec. 301.6241-7 are consistent with
congressional intent as they implement the express rules provided by
Congress in section 6241(11) of the Code. While it is correct that
Sec. 301.6241-7(f) may apply outside of tiered structures and that the
situation contemplated in the preamble to the November 2020 NPRM is
more likely to apply in tiered structures as they may be more complex,
the special enforcement considerations provided in the preamble to the
November 2020 NPRM may also apply in non-tiered structures. In
addition, Sec. 301.6241-7(f) does not extend the period of
limitations. Section 301.6241-7(f) only applies if the partner's period
of limitations has not expired and nothing in Sec. 301.6241-7(f)
extends the partner's period of limitations. Although the period of
limitations on making adjustments at the partnership level under
section 6235 will have expired, as noted previously, if the centralized
partnership audit regime does not apply to an item or amount, then the
partner's period of limitations on making assessments applies to that
item or amount and not the period of limitations on making adjustments
under section 6235. Accordingly, Sec. 301.6241-7(f), if applicable,
merely changes what period of limitations applies but does not extend
any period of limitations.
For these reasons, the recommendation to remove Sec. 301.6241-7(f)
in its entirety is not adopted.
C. Chapter 1 Taxes and Penalties
Two comments were received on proposed Sec. 301.6241-7(g), which
allows the IRS to adjust partnership-related items that are taxes,
penalties, additions to tax, or additional amounts (including making
any determinations necessary to make those adjustments) imposed on the
partnership under chapter 1 outside of the centralized partnership
audit regime. One comment recommended that Sec. 301.6241-7(g) be
withdrawn because the rule is not necessary within the construct of the
centralized partnership audit regime as the commenter does not believe
a partnership-partner would owe an imputed underpayment as a result of
the audited partnership electing to push out the adjustments. The
comment noted that there should not be a second proceeding to make
adjustments at the partner level. This comment seems to misunderstand
the application of proposed Sec. 301.6241-7(g). The comment seems to
be based on language in the preamble of the November 2020 NPRM that was
discussing proposed changes to Sec. 301.6225-1 and not proposed Sec.
301.6241-7(g). As proposed Sec. 301.6241-7(g) does not apply in any of
the situations the comment expresses concern about, the comment is not
adopted. A comment noted that items under chapter 1 are imposed on
partners, not partnerships, and that Sec. 301.6241-6 already addresses
taxes outside of chapter 1. That comment recommended that proposed
Sec. 301.6241-7(g) be amended to clarify its scope and purpose, and
both comments requested that examples be added. This recommendation has
been adopted.
Under chapter 1 of the Code, a partnership may, in certain
circumstances, be directly liable for taxes, penalties, additions to
tax, or additional amounts. In these circumstances, the amount is
assessed and collected from the partnership and not its partners. For
example, a real estate mortgage investment conduit may have a liability
under Sec. Sec. 860F or 860G. As another example, a partnership that
has self-certified as a qualified opportunity fund under Sec. 1400Z-
2(d)(1) may have a liability under Sec. 1400Z-2. Although chapter 1
liability for partnerships is rare, it does exist and more
circumstances could be added by Congress in the future. These amounts
are the ones covered by Sec. 301.6241-7(g). Section 301.6241-7(g) does
not apply to any taxes outside of chapter 1, and it does not apply to
any taxes, penalties, additions to tax, or additional amounts which,
under the Code, would be assessed and collected from the partners of
the partnership. Because Sec. 301.6241-7(g) does not apply to taxes
outside of chapter 1, it does not apply to any adjustments to an
imputed underpayment as an imputed underpayment is a tax imposed by
subchapter C of chapter 63 and not chapter 1. Although under section
6232(a) an imputed underpayment is assessed and collected as if it were
a tax imposed by subtitle A (which includes chapter 1), an imputed
underpayment is determined under the provisions of subchapter C of
chapter 63, and the partnership's liability for any imputed
underpayment is created under subchapter C of chapter 63. This includes
any imputed underpayment of the audited partnership as well as any
imputed underpayment a pass-through partner is liable for under section
6226(b)(4)(A)(ii)(II) when the pass-through partner fails to furnish
statements to its partners when the pass-through partner receives a
push out statement from another pass-through entity. Proposed Sec.
301.6241-7(g) does not create a second partner-level proceeding to make
adjustments as proposed Sec. 301.6241-7(g) only applies to any chapter
1 taxes and penalties that are the liability of the audited
[[Page 75486]]
partnership and, therefore, does not apply to any partners.
Also, an example is added to Sec. 301.6225-1(h)(15) to illustrate
how adjustments to partnership-related items that are taxes, penalties,
additions to tax, or additional amounts under chapter 1 are made under
these regulations.
Another comment recommended creating a new grouping for adjustments
to chapter 1 taxes and penalties that are the liability of the
partnership and adjustments to an imputed underpayment calculated by
the partnership. The comment noted that the new grouping would act just
like the credit grouping, however, the comment recommended not using
the existing credit grouping as this may cause confusion because these
items are not credits. Although the Treasury Department and the IRS
agree that chapter 1 liabilities of the partnership and the imputed
underpayment are not credits, adding an additional grouping would
create an administrative burden on the IRS as it would require amending
all forms, instructions, worksheets, computer programs, and internal
processes that involve groupings. The administrative burden that would
be imposed on the IRS far outweighs any confusion that may occur in the
rare situation where the imputed underpayment or chapter 1 taxes or
penalties are adjusted and placed into the credit grouping. In
addition, although these items are not technically credits, the items
easily operate like credits for purposes of the calculation of the
imputed underpayment, and thus it is logical to include them with the
credit grouping and treat them similarly. Accordingly, this comment is
not adopted.
D. Adjustments to Imputed Underpayments
One comment was received on the provisions for situations where the
IRS makes an adjustment to an imputed underpayment calculated by the
partnership (for example, as part of the filing of an AAR). These
provisions were proposed amendments to Sec. 301.6225-1(c)(3),
(e)(3)(ii), (f)(1)(ii), (f)(3), and Sec. 301.6226-2(g)(4).
The comment stated that proposed Sec. 301.6226-2(g)(4) limits the
partnership's ability to push out an imputed underpayment that arises
from the adjustment to a previously calculated imputed underpayment and
stated that nothing in the Code or legislative history implies that
there is a limitation on the push out election. The comment recommended
that a partnership that has filed an AAR be permitted to push out any
adjustments made to the imputed underpayment included on the AAR. As
previously noted, there is no legislative history of the centralized
partnership audit regime, but the Treasury Department and the IRS agree
that section 6226 does not limit the ability of a partnership to elect
to push out to each partner from the reviewed year that partner's share
of any adjustment to a partnership-related item.
Under section 6241(2)(B)(i), the imputed underpayment is included
within the definition of ``partnership-related item.'' Accordingly, any
adjustment to an imputed underpayment must be made under the
centralized partnership audit regime. The comment stated that any
adjustment to an imputed underpayment should not result in a second
imputed underpayment. The comment stated that the IRS could merely
adjust the incorrect imputed underpayment, assess the difference
against the partnership, and issue notice and demand to the
partnership. The comment did not provide the source of the authority
for the IRS to assess a change in an imputed underpayment without
making an adjustment to the imputed underpayment under the centralized
partnership audit regime.
Under section 6221, any adjustment to a partnership-related item,
including an imputed underpayment, must be determined at the
partnership level under subchapter C of chapter 63. Under section
6232(b), the IRS may not assess an imputed underpayment if the IRS does
not issue an FPA to the partnership it is assessing. As the comment
correctly noted, there are several instances in which a partnership (or
other pass-through partner) can be liable for an imputed underpayment
that is calculated by the partnership--when the partnership files an
AAR and does not elect to push out the adjustments to its reviewed year
partners, when a pass-through partner pays an imputed underpayment as
part of an amended return modification, and where a pass-through
partner fails to timely issue statements to its partners when it
receives a statement under section 6226 and is, therefore, liable for
an imputed underpayment. In all of these circumstances, the partnership
has chosen to be liable for an imputed underpayment and has not chosen
to pass the adjustments out to its partners. In all of these
circumstances, the IRS has not issued an FPA to the partnerships at
issue. Because these examples are not examples in which the partnership
is self-reporting the amount of the imputed underpayment and no FPA has
been issued, section 6232(b) prohibits the IRS from assessing an
imputed underpayment calculated on an adjustment the IRS makes to a
partnership-related item (in this case, an imputed underpayment).
As previously mentioned, in all cases where the IRS is making an
adjustment to an imputed underpayment previously calculated by a
partnership, the partnership is liable for the imputed underpayment,
and the time to forego that liability by pushing out the adjustments to
its partners has passed. In cases where the adjustment is solely to the
previously calculated imputed underpayment, Sec. 301.6226-2(g)(4)
provides that the partnership cannot push out the imputed underpayment
to its partners from the reviewed year. Although section 6226 does not
contain a limitation on the ability to elect to push out the
adjustments, there are key differences here.
First, the partnership has already chosen to be liable for the
imputed underpayment that has been adjusted. The imputed underpayment
is only ever the liability of the partnership and not the partners
because the deadline to push out the adjustments that resulted in the
imputed underpayment has passed. Therefore, if the partnership could
make a push out election of this portion of the imputed underpayment
that adjustment would be allocable to the partnership. See generally
Sec. 301.6226-2(f)(1)(ii) and (iii) (unless adjusted, a partner's
share of the adjustments is the same as it was allocated originally or
how they would be allocated if the item was included on the partnership
return). An imputed underpayment is not an item that is allocable to
partners on a Schedule K-1; rather it is an entity-level liability of
the partnership. Accordingly, there would be no practical difference
between pushing out the imputed underpayment adjustment to itself and
paying the imputed underpayment at the time it pushes out any unrelated
adjustments to its partners. Practically, in both situations the
partnership would be liable for the change in the imputed underpayment
in the adjustment year.
Second, allowing the partnership to push out an adjustment to an
imputed underpayment to its partners would frustrate the intent of the
centralized partnership audit regime by allowing a partnership to
circumvent sections 6225 and 6226 in situations where these provisions
have already determined that the partnership is liable for the
underlying imputed underpayment that is being adjusted. There is
nothing under sections 6226 or 6227 that allows a partnership to push
out the
[[Page 75487]]
adjustments that resulted in an imputed underpayment to its reviewed
year partners after the deadline for making that election or furnishing
the statements has passed. Once the deadline has passed, the
partnership is liable for the imputed underpayment.
Finally, allowing the partnership to push out portions of an
imputed underpayment to its partners for them to pay might prevent the
assessment and collection of the imputed underpayment, which would
frustrate the purpose of the centralized partnership audit regime.
Under section 6226(b), a partner takes the pushed-out adjustments into
account by calculating the amount by which the partner's chapter 1 tax
would have changed in the first affected year and any intervening year.
This change in chapter 1 tax is referred to in Sec. 301.6226-3 as the
additional reporting year tax, and it is a tax for the year in which
the statement was furnished by the audited partnership and not the
prior years. However, an imputed underpayment is not a tax under
chapter 1. An imputed underpayment is imposed by subchapter C of
chapter 63. Therefore, if a partnership was allowed to push out
portions of the imputed underpayment to be paid by its partners,
section 6226(b) would arguably exclude that imputed underpayment
portion from the calculation of the additional reporting year tax. No
other provision in the Code would allow the IRS to assess an imputed
underpayment on a partner in situations where the partnership has made
an election under section 6226, leaving the IRS without a method to
assess. Therefore, the recommendation to allow a partnership to push
out an adjustment to an imputed underpayment is not adopted.
E. Indirect Methods of Proof of Income
One comment was received on proposed Sec. 301.6241-7(e), which
implements section 6241(11)(B)(iv). Under proposed Sec. 301.6241-7(e)
the IRS may adjust any partnership-related item as part of a
determination of a partner's liability if that determination is based
on an indirect method of proof of income. The comment recommended that
Sec. 301.6241-7(e) be revised to include a definition of ``indirect
method of proof of income'' so that taxpayers understand precisely when
the rule could apply given the extraordinary power of the special
enforcement rules. The comment also recommended that the definition be
proposed in a notice of proposed rulemaking so it will be open to
notice and comment.
Under TEFRA, section 6231(c) provided that, for special enforcement
matters, the IRS may, through regulations, treat partnership items that
interfere with the effective and efficient enforcement of subchapter C
of chapter 63 as nonpartnership items. One of those special enforcement
matters is indirect methods of proof of income. Section 6231(c)(1)(C).
Section 301.6231(c)-6 provides rules for the determination of a
partner's liability that is based on an indirect method of proof of
income. Both Sec. 301.6241-7(e) and Sec. 301.6231(c)-6 use the phrase
``indirect methods of proof of income.'' Additionally, both section
6241(11)(B)(iv) and section 6231(c)(1)(C) use the phrase ``indirect
methods of proof of income.'' The term ``indirect methods of proof of
income'' is not a term of art under either TEFRA or the centralized
partnership audit regime. The meaning of the term in TEFRA and the
centralized partnership audit regime is the same as the term is used in
other areas of tax law. Indirect methods of proof of income are well-
established methods under case law for situations where a taxpayer's
income is determined using indirect evidence. Having different
definitions of ``indirect methods of proof of income'' for partnership
proceedings would result in confusion to both the IRS and taxpayers.
For the reasons stated, the comment is not adopted.
F. General Comments
One comment recommended changes to the phrasing of the special
enforcement provisions. The comment recommended that the regulations
under Sec. 301.6241-7 be modified to be more like the regulations
implementing section 6231(c) under TEFRA which, as previously
mentioned, is also about special enforcement matters. The regulations
that implement section 6231(c) are Sec. Sec. 301.6231(c)-3 through
301.6241(c)-8 (TEFRA special enforcement regulations). The comment also
made recommendations about the terms used in proposed Sec. 301.6241-7.
i. Discretion of the IRS in Utilizing the Special Enforcement Rules
All of the provisions under proposed Sec. 301.6241-7 provide that
the IRS may make adjustments or determinations about partnership-
related items outside of the centralized partnership audit regime. The
IRS has discretion regarding whether to utilize these rules if the
conditions prescribed for each special enforcement matter are met.
Under TEFRA, there are five special enforcement matters contained in
the TEFRA special enforcement regulations--termination and jeopardy
assessments; criminal investigations; indirect methods of proof of
income; bankruptcy and receivership; and prompt assessment. For all of
these special enforcement considerations, if the specified event
occurs, the TEFRA special enforcement provision automatically applies,
and the partnership items of the partner to whom the special
enforcement matter applies become nonpartnership items.
The comment stated that, under the TEFRA special enforcement
regulations, the IRS has no discretion not to apply the special
enforcement rules if the ``triggering event'' occurs. The comment
contrasts the TEFRA rule with proposed Sec. 301.6241-7, which provides
the IRS may utilize the special enforcement rules if the triggering
events occur. The comment recommended that Sec. 301.6241-7(c)
(termination or jeopardy assessments), (d) (criminal investigations),
and (e) (indirect methods of proof of income) be modified to provide,
if the triggering event occurs, that the IRS has no discretion to apply
the special enforcement rules due to the extraordinary consequences of
special enforcement.
The comment is correct that under the TEFRA special enforcement
regulations if the specified triggering event occurs the special
enforcement rules automatically apply. However, the automatic
triggering of the rules does not mean that the IRS lacks discretion
regarding whether the special enforcement rules apply. Except for the
rules on bankruptcy and receivership and prompt assessment, each
special enforcement rule in TEFRA is triggered by an affirmative
exercise of discretion by the IRS. For example, under Sec.
301.6231(c)-5, which provides rules for criminal investigations, for
this provision to apply, the partner must be under criminal
investigation and the IRS must also send the partner a letter expressly
telling the partner that his or her partnership items will be treated
as nonpartnership items. The IRS has discretion whether to send such a
letter. Similarly, the IRS has discretion regarding whether to take the
affirmative action that would trigger the application of the TEFRA
special enforcement regulations such as deciding whether to make a
termination or jeopardy assessment or issue a statutory notice of
deficiency based on an indirect method of proof. Sec. Sec.
301.6231(c)-4; 301.6231(c)-6.
Under the TEFRA special enforcement regulations, only two rules
have a triggering event that is not an action of the IRS. Under Sec.
301.6231(c)-7, generally, the partnership items of a partner are
treated as nonpartnership
[[Page 75488]]
items if the partner has filed for bankruptcy or is in a receivership
proceeding. Section 301.6241(c)-7 does not require the IRS to be
notified or know about the bankruptcy or receivership. In many
situations the IRS does not learn that a specific partner has been in
bankruptcy or receivership until well into the TEFRA proceeding at a
time when the partner's period of limitations on assessment would have
expired if it was not for the minimum period described in section 6229.
This has caused substantial administrative problems for the IRS because
the IRS may be properly obtaining extensions under section 6229(b) but
those would be inapplicable to a specific partner based on facts not
known to the IRS.
In addition, there are fundamental differences between TEFRA and
the centralized partnership audit regime that affect whether the
special enforcement rules should automatically apply if the triggering
event occurs. Under TEFRA, any adjustments made during a TEFRA
proceeding are ultimately passed to the partners who are liable for any
taxes on those adjustments. In contrast, in the centralized partnership
audit regime the proceeding is one of the partnership and not the
partners, and the examination is determining the liability of the
partnership and not the partners. Therefore, there may be situations
where utilizing the special enforcement rules under Sec. 301.6241-7
are not appropriate, even if the provision would apply because there is
a liability being determined in a proceeding under the centralized
partnership audit regime. For example, the IRS may already have the
partnership under examination or the partnership may have already filed
a petition in response to an FPA. In those cases, it may be more
efficient to include those adjustments with the other adjustments being
made rather than make adjustments in two parallel proceedings,
especially if the partnership proceeding is close to resolution.
Therefore, for the reasons discussed previously, the comment is not
adopted.
The comment also noted that, unlike TEFRA, Sec. 301.6241-7 does
not address a situation where a partner and the partnership have
different taxable years, although the comment noted that one of the
TEFRA special enforcement provisions also does not address this
situation. The comment recommended that the proposed rules in Sec.
301.6241-7 be revised to adopt the language from the TEFRA special
enforcement regulations to provide that the special enforcement rules
under Sec. 301.6241-7 apply to partnership-related items arising in
any partnership taxable year ending on or before the last day of the
taxable year of the partner.
Although the TEFRA special enforcement regulations (except one),
provide specific rules regarding which taxable year or years the
provision applies to, as the comment correctly noted, the TEFRA special
enforcement regulations automatically apply if the specified triggering
event occurs. In addition, the TEFRA special enforcement regulations
apply to all partnership items of a partner, not specified ones as in
Sec. 301.6241-7, so it is clear which items are treated as
nonpartnership items and for which years without any notification from
the IRS. As discussed previously, the rules under proposed Sec.
301.6241-7 do not automatically apply if the specific triggering event
occurs, and the partner will not have to determine whether the rule
applies and to which items or years. Under Sec. 301.6241-7(h), the IRS
will notify, in writing, the taxpayer who is being adjusted that the
rule will apply. As the partner will have specific information directly
from the IRS as to his or her specific facts and circumstances, the
comment is not adopted.
ii. Items and Adjustments
One comment was received regarding the use of the term
``adjustment'' in proposed Sec. 301.6241-7. Under 6241(11), the
Treasury Department and the IRS may prescribe regulations for special
enforcement matters under which the centralized partnership audit
regime (or any portion thereof) does not apply to such items. Under
proposed Sec. 301.6241-7, which implements section 6241(11), the IRS
may adjust partnership-related items outside of the centralized
partnership audit regime in the specified special enforcement matters.
The comment recommended that proposed Sec. 301.6241-7 be revised
to state that a partnership-related item (and any related penalties)
that the IRS determines is not subject to the centralized partnership
audit regime is subject to deficiency procedures under subchapter B of
chapter 63. The comment stated that the use of the term ``adjustments''
is inconsistent with the authority under section 6241(11), which
expressly provides that section 6241(11) applies to partnership-related
``items.''
As an initial matter, it is unclear from the comment whether the
comment has interpreted proposed Sec. 301.6241-7 to apply to an entire
partnership-related item, or just a partner's portion of a partnership-
related item such that if the IRS utilizes the special enforcement
rules the entire partnership-related item may not be adjusted under the
centralized partnership audit regime. If the IRS utilized the special
enforcement rules, only the portion of the partnership-related item(s)
to which the special enforcement provision applies may be adjusted or
determined outside of the centralized partnership audit regime.
In addition, utilizing the special enforcement rules to adjust
partnership-related items as part of an adjustment being made at the
partner level where a special enforcement matter exists does not
prohibit the IRS from adjusting the entire partnership-related item
under the centralized partnership audit regime. The partnership is not
bound by any determinations in a partner-level proceeding to which it
is not a party. Proposed Sec. 301.6241-7(i) contains rules for
coordinating adjustments made to partnership-related items at the
partnership level so that the same partnership-related item is not
taxed twice. In addition, a partnership may request to modify the
imputed underpayment based on adjustments previously taken into account
by a partner.
The special enforcement rules only apply if there is a special
enforcement matter. In a partnership not all partners have the same
facts and circumstances. Therefore, there may be a special enforcement
matter for one partner but not another. The IRS may not adjust
partnership-related items outside of the centralized partnership audit
regime that would be allocable to a partner who does not have a special
enforcement matter. This rule is similar to the rule under TEFRA. Under
section 6231(c)(2) partnership items are treated as nonpartnership
items if a special enforcement matter exists, to the extent provided in
regulations. Under the TEFRA special enforcement regulations, only the
partnership items of the specific partner who has the special
enforcement matter are treated as nonpartnership items. In order to
alleviate any confusion, in response to this comment, Sec. 301.6241-
7(a) is modified to clarify that only the portion of the partnership-
related item that is subject to the special enforcement rules may be
adjusted outside of the centralized partnership audit regime and that
Sec. 301.6241-7 does not prohibit the IRS from adjusting the entire
partnership-related item under the centralized partnership audit
regime.
With regard to the use of the term ``adjustments'' instead of
``items,'' section 6241(11) applies to partnership-related items. The
term ``partnership-related item'' is a term of art under the
centralized partnership audit regime
[[Page 75489]]
and is defined in section 6241(2)(B). As a term of art, ``partnership-
related'' is not separate from ``item.'' Under the centralized
partnership audit regime, adjustments are made to partnership-related
items. The rules under Sec. 301.6241-7 apply to partnership-related
items and provide rules for adjusting those partnership-related items
in situations where there is a special enforcement matter. Accordingly,
the special enforcement rules already apply to ``items.'' In addition,
the Treasury Department and the IRS are unaware of any situation where
no adjustment is being made to an item and yet the application of the
centralized partnership audit regime would matter. For the reasons
stated, this comment is not adopted.
In addition, if an adjustment is made outside of the centralized
partnership audit regime, that adjustment would be subject to the rules
that would apply if the centralized partnership audit regime did not
exist. Accordingly, deficiency procedures would apply to the adjustment
if the adjustment would be subject to deficiency procedures for a
taxpayer not subject to the centralized partnership audit regime. To
the extent the comment is recommending extending deficiency procedures
to adjustments that would not normally be subject to deficiency
procedures, the comment is not adopted. The comment provides no
rationale for why an adjustment made outside of the centralized
partnership audit regime using the special enforcement rules should be
different than an adjustment that is made to an item that is not
subject to the centralized partnership audit regime.
5. Comments Outside the Scope of the November 2020 NPRM
One comment included several recommendations that are outside the
scope of the November 2020 NPRM. Accordingly, no response is provided
for those recommendations, which include a recommendation to amend
Sec. 301.6225-1(e)(3)(ii) to provide that net negative adjustments to
credits can always be used to reduce the imputed underpayment. Although
the November 2020 NPRM proposed adding a sentence to Sec. 301.6225-
1(e)(3)(ii), the proposed change was limited to adding a sentence about
net negative adjustments to taxes and penalties for which the
partnership is liable for under chapter 1; it did not repropose the
entire paragraph. The recommendation in the comment would require
modifying the portion of Sec. 301.6225-1(e)(3)(ii) that was not
proposed to be amended in the November 2020 NPRM. The addition to Sec.
301.6225-1(e)(3)(ii) in the November 2020 NPRM is unrelated to the
provision about netting credits contained in other portions of Sec.
301.6225-1(e)(3)(ii). Therefore, this comment is outside the scope of
the November 2020 NPRM.
The comment also included some recommendations on modifications to
forms and instructions. The November 2020 NPRM does not propose any
rules regarding forms and instructions. Accordingly, this comment is
outside of the scope of the November 2020 NPRM.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations.
In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.) it is hereby certified that this final rule will not have a
significant economic impact on a substantial number of small entities.
The final rules directly affect any partnership subject to the
centralized partnership audit regime under subchapter C of chapter 63.
As all partnerships are subject to the centralized partnership audit
regime unless they make a valid election out of the regime, the final
rules are expected to affect a substantial number of small entities.
However, the IRS has determined that the economic impact on small
entities affected by the final rule would not be significant.
The final rules under Sec. 301.6241-7 implement section 6241(11)
and allow the IRS, for partnership-related items that involve special
enforcement matters, to provide that the centralized partnership audit
regime (or a portion thereof) does not apply to such partnership-
related items and that such items are subject to special rules as is
necessary for the efficient and effective enforcement of the Code. As
such, the rules provide for certain situations where partnership-
related items may be adjusted outside of the centralized partnership
audit regime. In all but one of these situations (involving chapter 1
taxes and penalties that are the liability of the partnership), if the
rules in Sec. 301.6241-7 were utilized, then the adjustments would be
made to partners of the partnership, rather than the partnership itself
and, thus, utilizing the final rules would not have an impact on small
entities. Additionally, many small entities may be eligible to elect
out of the centralized partnership audit regime under section 6221(b).
Accordingly, if a small entity is eligible to elect out, they may
choose to elect out of the regime at which point the rules contained in
Sec. 301.6241-7 would be inapplicable to those entities.
Finally, the final rules under Sec. 301.6241-7 address the process
for conducting an examination and do not have a significant economic
impact on small entities as the rules do not affect entities'
substantive tax, such as the requirement to include items in income or
the deductibility of items. The final rules promulgated under other
Code sections simply clarify sections of regulations previously
published.
The Secretary hereby certifies that the final rule will not have a
significant economic impact on a substantial number of small entities.
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for the Office of Advocacy of the Small Business Administration
for comment on its impact on small business, and no comments were
received.
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 <a href="http://www.irs.gov">www.irs.gov</a>.
Drafting Information
The principal author of these regulations is Jennifer M. Black of
the Associate Chief Counsel (Procedure and Administration). However,
other personnel from the Treasury Department and the IRS participated
in the development of the regulations.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
0
Paragraph 1. The authority citation for part 301 is amended by adding
entries in numerical order for Sec. Sec. 301.6221(b)-1 and 301.6241-7
to read in part as follows:
[[Page 75490]]
Authority: 26 U.S.C. 7805.
* * * * *
Section 301.6221(b)-1 also issued under sections 6221 and 6241.
* * * * *
Section 301.6241-7 also issued under section 6241.
* * * * *
0
Par. 2. Section 301.6221(b)-1 is amended by revising paragraphs
(b)(3)(ii)(D) and (F), adding paragraph (b)(3)(ii)(G), and adding a
sentence to the end of paragraph (f) to read as follows:
Sec. 301.6221(b)-1 Election out for certain partnerships with 100 or
fewer partners.
* * * * *
(b) * * *
(3) * * *
(ii) * * *
(D) A wholly owned entity disregarded as separate from its owner
for Federal income tax purposes,
* * * * *
(F) Any person who holds an interest in the partnership on behalf
of another person, or
(G) A qualified subchapter S subsidiary, as defined in section
1361(b)(3)(B).
* * * * *
(f) * * * Notwithstanding the preceding sentence, paragraphs
(b)(3)(ii)(D), (F), and (G) of this section apply to taxable years
ending on or after November 20, 2020.
Sec. 301.6223-1 [Amended]
0
Par. 3. Section 301.6223-1 is amended in paragraph (e)(8) by
0
a. Removing the language ``B'' and ``B's'' and adding ``PR'' and
``PR's'' in their place, respectively, in Example 1; and
0
b. Removing ``B's'' and adding ``PR's'' in its place in Example 2.
0
Par. 4. Section 301.6225-1 is amended:
0
a. By revising the paragraph (b)(3) subject heading;
0
b. By adding two sentences to the end of paragraph (b)(4);
0
c. By adding a sentence to the end of paragraph (c)(3);
0
d. By revising paragraphs (d)(2)(ii) and (iii);
0
e. By removing reserved paragraph (d)(3)(iii)(C);
0
f. By adding a sentence to the end of paragraph (e)(3)(ii);
0
g. By revising paragraph (f)(1)(ii);
0
h. By adding paragraph (f)(3);
0
i. By adding paragraphs (h)(13), (14), and (15); and
0
j. By adding a sentence to the end of paragraph (i)(1).
The revisions and additions read as follows:
Sec. 301.6225-1 Partnership adjustment by the Internal Revenue
Service.
* * * * *
(b) * * *
(3) Adjustments to items for which tax has been collected under
chapters 3 and 4 of the Internal Revenue Code (Code). * * *
(4) * * * In addition, if a positive adjustment to an item is
related to, or results from, a positive adjustment to another item, one
of the positive adjustments will generally be treated as zero solely
for purposes of calculating any imputed underpayment unless the IRS
determines that an adjustment should not be treated as zero in the
calculation of the imputed underpayment. This paragraph applies to the
calculation of any imputed underpayment, including imputed
underpayments calculated by a partnership or pass-through partner (for
example, as part of the filing of an administrative adjustment request
(AAR) under section 6227).
(c) * * *
(3) * * * Each adjustment to any tax, penalty, addition to tax, or
additional amount for the taxable year for which the partnership is
liable under chapter 1 of the Code (chapter 1) and each adjustment to
an imputed underpayment calculated by the partnership is placed in the
credit grouping.
* * * * *
(d) * * *
(2) * * *
(ii) Negative adjustment. A negative adjustment is any adjustment
that is a decrease in an item of income; a partnership adjustment
treated under paragraph (d)(2)(i) of this section as a decrease in an
item of income; an increase in an item of credit; a decrease in an item
of tax, penalty, addition to tax, or additional amount for which the
partnership is liable under chapter 1; or a decrease to an imputed
underpayment calculated by the partnership for the taxable year.
(iii) Positive adjustment. A positive adjustment is any adjustment
that is not a negative adjustment as defined in paragraph (d)(2)(ii) of
this section.
* * * * *
(e) * * *
(3) * * *
(ii) * * * A net negative adjustment to a tax, penalty, addition to
tax, or additional amount for which the partnership is liable under
chapter 1 or an adjustment to any imputed underpayment calculated by
the partnership for the taxable year is not an adjustment described in
paragraph (f) of this section (adjustments that do not result in an
imputed underpayment).
* * * * *
(f) * * *
(1) * * *
(ii) The calculation under paragraph (b)(1) of this section results
in an amount that is zero or less than zero, unless paragraph (f)(3) of
this section applies.
* * * * *
(3) Exception to treatment as an adjustment that does not result in
an imputed underpayment--(i) Application of this paragraph (f)(3). If
the calculation under paragraph (b)(1) of this section results in an
amount that is zero or less than zero due to the inclusion of a net
negative adjustment to a tax, penalty, addition to tax, or additional
amount for which the partnership is liable under chapter 1 or an
adjustment to any imputed underpayment calculated by the partnership
for the taxable year, this paragraph (f)(3) applies, and paragraph
(f)(1) of this section does not apply except as provided in paragraph
(f)(3)(ii)(C) of this section.
(ii) Recalculation if paragraph (f)(3) of this section applies--(A)
In general. If this paragraph (f)(3) applies, the imputed underpayment
is recalculated under paragraph (b)(1) of this section without regard
to a net negative adjustment to a tax, penalty, addition to tax, or
additional amount for which the partnership is liable under chapter 1
or an adjustment to any imputed underpayment calculated by the
partnership for the taxable year. The net negative adjustment that was
excluded from the imputed underpayment recalculation is then treated in
one of two ways under paragraphs (f)(3)(ii)(B) and (C) of this section
depending on the results of the recalculation.
(B) Recalculation is greater than zero. If the result of the
recalculation under paragraph (f)(3)(ii) of this section is greater
than zero, the IRS may apply the portion of the net negative
adjustment(s) that was excluded from the recalculation to reduce the
imputed underpayment to zero, but not below zero. In this case, the
imputed underpayment is zero, but the adjustments included in the
recalculation and the remaining net negative adjustment(s) excluded
from the recalculation under paragraph (f)(3)(ii)(A) of this section
are not adjustments that do not result in an imputed underpayment
subject to treatment as described in paragraph (f)(2) of this section.
See paragraph (h)(13) of this section (Example 13).
[[Page 75491]]
(C) Recalculation is zero or less than zero. If the result of the
recalculation under paragraph (f)(3)(ii) of this section is zero or
less than zero, the adjustments included in the recalculation are
treated as adjustments that do not result in an imputed underpayment
under paragraph (f)(1)(ii) of this section. The net negative
adjustment(s) that was excluded from the recalculation is not an
adjustment that does not result in an imputed underpayment subject to
treatment as described in paragraph (f)(2) of this section. See
paragraph (h)(14) of this section (Example 14).
* * * * *
(h) * * *
(13) Example 13. The IRS initiates an administrative proceeding
with respect to Partnership's 2019 partnership return and makes
adjustments as follows: net positive adjustment of $100 ordinary
income, net negative adjustment of $20 in credits, and a net negative
adjustment of $25 to a chapter 1 tax liability of the partnership. The
IRS determines that the net negative adjustment in credits should be
taken into account in the calculation of the imputed underpayment in
accordance with paragraph (b)(1)(v) of this section. Pursuant to
paragraph (b)(1) of this section, the $100 net positive adjustment to
ordinary income is multiplied by 40 percent (highest tax rate in
effect), which results in a $40 imputed underpayment. The adjustments
in the credits grouping are then applied, which include the adjustment
to credits and the adjustment to the chapter 1 tax liability. Applying
the credits results in an amount less than zero as described in
paragraph (f)(3)(i) of this section ($40-$20-$25 = -$5). Pursuant to
paragraph (f)(3)(ii) of this section, the imputed underpayment is
recalculated without regard to the adjustment to the chapter 1 tax
liability, resulting in a recalculation amount greater than zero as
described in paragraph (f)(3)(ii)(B) of this section ($40-$20 = $20).
Pursuant to paragraph (f)(3)(ii)(B) of this section, the IRS may apply
a portion of the adjustment to chapter 1 tax liability to reduce the
recalculation to zero but not below zero. In this case, the
recalculation amount would be reduced to zero using $20 of the $25
adjustment to chapter 1 tax liability. Because the imputed underpayment
was reduced to zero, pursuant to paragraph (f)(3)(ii)(B) of this
section, the adjustments that went into the recalculation are not
adjustments that do not result in an imputed underpayment. These
adjustments are the $100 adjustment to ordinary income and the $20
adjustment to credits. The remaining $5 adjustment to the chapter 1 tax
liability of the partnership is an adjustment that is treated as
described in paragraph (e)(3)(ii) of this section and is therefore not
taken into account on the partnership's adjustment year return.
(14) Example 14. The facts are the same as in paragraph (h)(13) of
this section (Example 13), but the negative adjustment to credits is
$50 instead of $20. Applying the credits results in an amount less than
zero as described in paragraph (f)(3)(i) of this section ($40-$50-$25 =
-$35). Pursuant to paragraph (f)(3)(ii) of this section, the imputed
underpayment is recalculated without regard to the adjustment to the
chapter 1 tax liability, resulting in a recalculation amount less than
zero as described in paragraph (f)(3)(ii)(C) of this section ($40-$50 =
-$10). Pursuant to paragraph (f)(3)(ii)(C) of this section, the
partnership adjustments resulting in the -$10 recalculation amount are
adjustments that do not result in an imputed underpayment treated in
accordance with paragraph (f)(1)(ii) of this section, and the $25
adjustment to chapter 1 tax liability is not treated as such an
adjustment and is therefore not taken into account on the partnership's
adjustment year return.
(15) Example 15. On its timely filed return for the 2022 taxable
year, Partnership reports that it self-certified as a qualified
opportunity fund, as defined in section 1400Z-2(d). Partnership also
reports that it has not satisfied the 90-percent investment standard,
as defined in Sec. 1.1400Z2(a)-1(b)(4) of this chapter, and reports an
amount due under section 1400Z-2(f) of $100. The IRS does not utilize
Sec. 301.6241-7(g) to determine adjustments to these partnership-
related items without regard to subchapter C of chapter 63. In an
administrative proceeding involving Partnership's 2022 taxable year,
the IRS, in examining the amount due under section 1400Z-2(f),
determines that Partnership incorrectly reported its qualified
opportunity zone property for one month and that there should be one
$40 adjustment to reduce the assets Partnership reported as qualified
opportunity zone property. The IRS also determines that the basis of
one of Partnership's qualified opportunity zone properties should be
reduced by $30. Under paragraph (d) of this section, the adjustments to
the basis and character of an asset are not adjustments to an item of
income. Therefore, the $30 adjustment to the basis of the asset and the
$40 recharacterization of an asset are treated as positive adjustments.
As a result of the determinations, the IRS determines that the amount
due for Partnership failing the section 1400Z-2(d)(1) investment
standard should be increased. This results in a $4 adjustment to
Partnership's liability under section 1400Z-2(f) which, under paragraph
(d)(2) of this section is a positive adjustment because it is an
increase in an amount Partnership is liable for under chapter 1. The
total netted partnership adjustment for the 2022 taxable year is $70
($30 basis adjustment + $40 recharacterization adjustment). Under
paragraph (c)(3) of this section, the $4 adjustment to Partnership's
liability under chapter 1 is treated as an adjustment to a credit.
Assuming the highest rate under section 1 or 11 is 40% this results in
an imputed underpayment of $32 (($70 x 40%) + $4 section 1400Z-2(f)
adjustment). The IRS issues a notice of final partnership adjustment to
Partnership for its 2022 taxable year and Partnership makes a timely
election under section 6226 with regard to the $32 imputed
underpayment. Under Sec. 301.6226-2(g)(1), when Partnership furnishes
statements to its reviewed year partners, Partnership must pay the $4
section 1400Z-2(f) amount because it is the liability of Partnership
and may not include that adjustment in the statements.
(i) * * *
(1) * * * Notwithstanding the preceding sentence, paragraphs
(b)(4), (c)(3), (d)(2)(ii), (d)(3)(iii)(C), (e)(3)(ii), (e)(3)(iii)(B),
(f)(1)(ii), (f)(3), and (h)(13), (14), and (15) of this section apply
to taxable years ending on or after November 20, 2020.
* * * * *
0
Par. 5. Section 301.6225-2 is amended:
0
a. In paragraph (d)(2)(vi)(A), by removing the period and the end of
the paragraph and adding in its place ``, by treating any approved
modifications and partnership adjustments allocable to the pass-through
partner as items reflected on the statement furnished to the pass-
through partner.'';
0
b. By revising paragraph (d)(2)(vi)(B); and
0
c. By adding a sentence to the end of the paragraph (g)(1).
The revision and addition read as follows:
Sec. 301.6225-2 Modification of imputed underpayment.
* * * * *
(d) * * *
(2) * * *
(vi) * * *
(B) Adjustments that do not result in an imputed underpayment. If a
pass-
[[Page 75492]]
through partner takes into account its share of the adjustments by
paying an amount described in paragraph (d)(2)(vi)(A) of this section
and there are any adjustments that do not result in an imputed
underpayment (as defined in Sec. 301.6225-1(f)), those adjustments 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 described in paragraph (d)(2)(vi)(A) of
this section is paid. This paragraph (d)(2)(vi)(B) does not apply if,
after making the calculation described in paragraph (d)(2)(vi)(A) of
this section, no amount exists and therefore no payment is required
under paragraph (d)(2)(vi)(A).
* * * * *
(g) * * *
(1) * * * Notwithstanding the preceding sentence, paragraph
(d)(2)(vi)(B) of this section applies to taxable years ending on or
after November 20, 2020.
* * * * *
0
Par. 6. Section 301.6225-3 is amended:
0
a. In paragraph (b)(1) by removing ``a reduction in non-separately
stated income or as an increase in non-separately stated loss'' and
adding in its place ``part of non-separately stated income or loss'';
0
b. By adding paragraphs (b)(8) and (d)(3) through (5); and
0
c. By adding a sentence to the end of paragraph (e)(1).
The additions read as follows:
Sec. 301.6225-3 Treatment of partnership adjustments that do not
result in an imputed underpayment.
* * * * *
(b) * * *
(8) Adjustments to items that are not items of income, gain, loss,
deduction, or credit. The partnership takes into account an adjustment
that does not result in an imputed underpayment that resulted from an
adjustment to an item that is not an item of income, gain, loss,
deduction, or credit by adjusting the item on its adjustment year
return but only to the extent the item would appear on the adjustment
year return without regard to the adjustment. If the item is already
reflected on the partnership's adjustment year return as an item that
is not an item of income, gain, loss, deduction, or credit, or in any
year between the reviewed year and the adjustment year, a partnership
should not create a new item in the amount of the adjustment on the
partnership's adjustment year return.
* * * * *
(d) * * *
(3) Example 3. On its partnership return for the 2020 taxable year,
Partnership placed Asset into service, reporting that Asset, a non-
depreciable asset, had a basis of $100. During an administrative
proceeding with respect to Partnership's 2020 taxable year, the IRS
determines that Asset has a basis of $90 instead of $100. The IRS also
determines that Partnership has a negative adjustment to credits of $4.
There are no other adjustments for Partnership's 2020 taxable year.
Under Sec. 301.6225-1(d)(2)(iii), the adjustment to the basis of an
asset is not an adjustment that is a decrease in an item of income, a
partnership adjustment treated under paragraph Sec. 301.6225-
1(d)(2)(i) as a decrease in an item of income, or an increase in an
item of credit. Therefore, the $10 adjustment to the basis of Asset is
treated as a $10 positive adjustment. The IRS determines that the net
negative adjustment to credits should be taken into account as part of
the calculation of the imputed underpayment. The total netted
partnership adjustment is $10, which, after applying the highest rate
and decreasing the product by the $4 adjustment to credits results in
an imputed underpayment of $0. Accordingly, both adjustments are
adjustments that do not result in an imputed underpayment under Sec.
301.6225-1(f). The adjustment year is 2022 and Partnership still owns
Asset. Under paragraph (b)(8) of this section, Partnership takes into
account the $10 adjustment to Asset on its 2022 return by reducing its
basis in Asset by $10. The reduction in the basis of Asset does not
require Partnership to recognize income or gain in situations where
income or gain is not otherwise recognized.
(4) Example 4. On its partnership return for the 2020 taxable year,
Partnership reports a recourse liability of $1,000. During an
administrative proceeding with respect to Partnership's 2020 taxable
year, the IRS determines that the liability is a nonrecourse liability
instead of a recourse liability. The IRS also determines that
Partnership has a negative adjustment to credits of $400. There are no
other adjustments for Partnership's 2020 taxable year. Under Sec.
301.6225-1(d), the adjustment to the liability is not an adjustment to
an item of income. Therefore, the $1,000 change to the liability is
treated as two $1,000 positive adjustments (a $1,000 decrease to
nonrecourse liabilities and a $1,000 increase to recourse liabilities).
The IRS determines that the adjustment to nonrecourse liabilities
should be treated as zero for purposes of calculating the imputed
underpayment under Sec. 301.6225-1(b)(4). The IRS also determines that
the net negative adjustment to credits should be taken into account as
part of the calculation of the imputed underpayment. The total netted
partnership adjustment is $1,000, which, after applying the highest
rate and decreasing the product by the $400 adjustment to credits
results in an imputed underpayment of $0. Accordingly, both adjustments
are adjustments that do not result in an imputed underpayment under
Sec. 301.6225-1(f). Partnership pays off the entire liability in 2021.
The adjustment year is 2022. Under paragraph (b)(8) of this section,
the liability no longer appears on the return due to the satisfaction
of the liability in the 2021 taxable year. Accordingly, no adjustment
is made to Partnership's 2022 return as a result of the adjustment to
the liability. If, instead of satisfying the entire $1,000 liability in
2021, Partnership made a payment of $500 towards the liability, on its
2022 return, Partnership would change the character of the $500
liability on its 2022 return to be a nonrecourse liability.
(5) Example 5. The facts are the same facts as the facts in
paragraph (d)(3) (Example 3) except that Partnership has two equal
partners--A and B--both of whom are individuals. After Partnership
receives a notice of proposed partnership adjustment containing the $4
negative adjustment to credits and the $10 adjustment to Asset,
Partnership requests modification under Sec. 301.6225-2(d)(2) and (e)
based on A filing an amended return. On her amended return, A takes
into account her share of the adjustments which is a $2 negative
adjustment to credits and a $5 adjustment to Asset. Based on A's facts
and circumstances, A does not have any tax impact as a result of the
adjustment to Asset so her amended return only reflects a tax impact
from the additional $2 in credits. Because A filed an amended return,
the imputed underpayment is recalculated without the portion of the
adjustments allocable to A. In this case, the total netted partnership
adjustment is $5, which, after applying the highest rate and decreasing
the product by the $2 adjustment to credits results in an imputed
underpayment of $0. Accordingly, both adjustments (the $10 adjustment
to Asset and the $4 adjustment to credits) are adjustments that do not
result in an imputed underpayment under paragraph (f) of this section.
The adjustment year is 2022 and Partnership still owns Asset.
[[Page 75493]]
Under paragraph (b)(8) of this section, Partnership takes into account
the $10 adjustment to Asset on its 2022 return by reducing its basis in
Asset by $10. The reduction in the basis of Asset does not require
Partnership to recognize income or gain in situations where income or
gain is not otherwise recognized.
(e) * * *
(1) * * * Notwithstanding the preceding sentence, paragraphs (b)(8)
and (d)(3) through (d)(5) of this section apply to taxable years ending
on or after November 20, 2020.
* * * * *
0
Par. 7. Section 301.6226-2 is amended by:
0
a. Revising the paragraph (g)(3) subject heading.
0
b. Adding paragraph (g)(4).
0
c. Adding a sentence to the end of paragraph (h)(1).
The revision and additions read as follows:
Sec. 301.6226-2 Statements furnished to partners and filed with the
IRS.
* * * * *
(g) * * *
(3) Adjustments subject to chapters 3 and 4 of the Code.* * *
(4) Liability for chapter 1 taxes and penalties. A partnership that
makes an election under Sec. 301.6226-1 with respect to an imputed
underpayment must pay any taxes, penalties, additions to tax,
additional amounts, or the amount of any adjustments to any imputed
underpayment calculated by the partnership that is determined under
subchapter C of chapter 63 for which the partnership is liable under
chapter 1 of the Code or subchapter C of chapter 63 at the time the
partnership furnishes statements to its partners in accordance with
paragraph (b) of this section. Any adjustments to such items are not
included in the statements the partnership furnishes to its partners or
files with the IRS under this section.
(h) * * *
(1) * * * Notwithstanding the prior sentence, paragraph (g)(4) of
this section applies to taxable years ending on or after November 20,
2020.
* * * * *
0
Par. 8. Section 301.6241-3 is amended:
0
a. By adding a sentence to the end of paragraph (a)(1);
0
b. By revising paragraph (b)(1)(ii);
0
c. By removing paragraph (b)(2);
0
d. By redesignating paragraphs (b)(3) and (4) as paragraphs (b)(2) and
(3) respectively;
0
e. By adding a sentence to the end of newly redesignated paragraph
(b)(3); and
0
f. By revising paragraphs (c), (e)(2)(ii), (f)(1) and (2), and (g).
The addition and revisions read as follows:
Sec. 301.6241-3 Treatment where a partnership ceases to exist.
(a) * * *
(1) * * * A determination under this section that a partnership has
ceased to exist does not prohibit the partnership from requesting
modification of the imputed underpayment under section 6225(c).
* * * * *
(b) * * *
(1) * * *
(ii) The partnership does not have the ability to pay, in full, any
amount that may be due under the provisions of subchapter C of chapter
63 for which the partnership is or may become liable. For purposes of
this section, a partnership does not have the ability to pay if the IRS
determines that the partnership's account is currently not collectible
based on the information the IRS has at the time of such determination.
* * * * *
(3) * * * A determination under this section that a partnership has
ceased to exist is not effective if the partnership has made a valid
election under Sec. 301.6226-1 in response to a notice of final
partnership adjustment or has paid all amounts due by the partnership
under subchapter C of chapter 63 within 10 days of notice and demand
for payment.
(c) Partnership adjustment takes effect. For purposes of this
section, a partnership adjustment under subchapter C of chapter 63
takes effect when the adjustment becomes finally determined as
described in Sec. 301.6226-2(b)(1); when the partnership and the IRS
enter into a settlement agreement regarding the adjustment; or, for
adjustments appearing on an administrative adjustment request (AAR),
when the request is filed.
* * * * *
(e) * * *
(2) * * *
(ii) The partnership must furnish statements to the former partners
and file the statements with the IRS no later than 60 days after the
later of the date of the notification to the partnership that the IRS
has determined that the partnership has ceased to exist or the date the
adjustment takes effect, as described in paragraph (c) of this section.
* * * * *
(f) * * *
(1) Example 1. The IRS initiates a proceeding under subchapter C of
chapter 63 with respect to the 2020 partnership taxable year of
Partnership. During 2023, in accordance with section 6235(b),
Partnership extends the period of limitations on adjustments under
section 6235(a) until December 31, 2025. However, on July 31, 2024,
Partnership terminates within the meaning of section 708(b)(1). Based
on the prior termination under section 708(b)(1), the IRS determines
that Partnership ceased to exist, as defined in paragraph (b) of this
section, on September 16, 2024. On February 1, 2025, the IRS mails
Partnership a notice of final partnership adjustment (FPA) that
determines partnership adjustments that result in a single imputed
underpayment. Partnership does not timely file a petition under section
6234 and does not make a valid election under section 6226. Partnership
files its final return of partnership income on October 15, 2024,
listing A and B, both individuals, as the partners for its final
taxable year ending July 31, 2024. Accordingly, under paragraph (d) of
this section, A and B are former partners. Therefore, A and B are
required to take their share of the partnership adjustments determined
in the FPA into account under paragraph (e) of this section.
(2) Example 2. The IRS initiates a proceeding under subchapter C of
chapter 63 with respect to the 2020 partnership taxable year of P, a
partnership. G, a partnership that has an election under section
6221(b) in effect for the 2020 taxable year, is a partner of P during
2020 and for every year thereafter. On February 3, 2025, the IRS mails
P an FPA that determines partnership adjustments that result in a
single imputed underpayment. P does not timely file a petition under
section 6234 and does not make a timely election under section 6226. On
March 21, 2025, the IRS determines that P has ceased to exist because P
did not make an election under section 6226, P's account is currently
not collectible, and the IRS does not expect P will be able to pay the
imputed underpayment. G terminated under section 708(b)(1) on December
31, 2024. On March 3, 2025, the IRS determines that G ceased to exist
in 2024 for purposes of this section in accordance with paragraph (b)
of this section. J and K, individuals, were the only partners of G
during 2024. Therefore, under paragraph (d)(1)(ii) of this section, J
and K, the partners of G during G's 2024 partnership taxable year, are
the former partners of G for purposes of this section. Therefore, J and
K are required to take into account their share of the adjustments
contained
[[Page 75494]]
in the statement furnished by P to G in accordance with paragraph (e)
of this section.
(g) Applicability date. This section applies to any determinations
made with respect to taxable years ending on or after November 20,
2020.
0
Par. 9. Section 301.6241-7 is added to read as follows:
Sec. 301.6241-7 Treatment of special enforcement matters.
(a) Items that involve special enforcement matters. In accordance
with section 6241(11)(B) of the Internal Revenue Code (Code), the
partnership-related items (as defined in Sec. 301.6241-1(a)(6)(ii))
described in this section have been determined to involve special
enforcement matters. If the rules in this section apply, only the
portion of the partnership-related item to which the special
enforcement matter applies may be adjusted without regard to subchapter
C of chapter 63. Nothing in this section prohibits the Internal Revenue
Service (IRS) from adjusting the entire partnership-related item under
subchapter C of chapter 63. See paragraph (i) of this section for rules
coordinating adjustments made under subchapter C of chapter 63 with
adjustments made without regard to subchapter C of chapter 63.
(b) Partnership-related items underlying items that are not
partnership-related items--(1) In general. The IRS may determine that
the rules of subchapter C of chapter 63 of the Code (subchapter C of
chapter 63) do not apply to an adjustment to a partnership-related item
of a partnership if--
(i) An examination is being conducted of a person other than the
partnership;
(ii) A determination regarding a partnership-related item is made,
as part of, or underlying, an adjustment to an item that is not a
partnership-related item of the person described in paragraph (b)(1)(i)
of this section; and
(iii) The treatment of the partnership-related item on the return
of the partnership under section 6031(a) or in the partnership's books
and records is based in whole or in part on information provided by the
person described in paragraph (b)(1)(i) of this section from that
person's books and records.
(2) Example. The following example illustrates the provisions of
paragraph (b)(1) of this section. For purposes of this example, the
partnership has no liabilities, is subject to subchapter C of chapter
63, and the partnership and partner each has a calendar taxable year.
On June 1, 2018, A acquires an interest in Partnership by contributing
Asset to Partnership in a section 721 contribution (Contribution).
Under section 722, A claims a basis in its interest in Partnership of
$50 equal to A's purported adjusted basis in Asset at the time of the
Contribution. Partnership claims a basis in Asset of $50 under section
723 equal to A's purported adjusted basis in Asset as of June 1, 2018,
based on information A provided to Partnership as part of the
Contribution. There is no activity in Partnership that gives rise to
any other partnership-related items between June 1, 2018, and June 2,
2019. On June 2, 2019, A sells A's interest in Partnership to B for
$100 in cash and reports a gain of $50 based on A's purported adjusted
basis in its interest in Partnership of $50. The IRS opens an
examination of A and determines that A's adjusted basis in its interest
in Partnership should be $30 instead of the $50 claimed by A because
A's Contribution to Partnership should have been $30 instead of $50.
Under paragraph (b) of this section, the IRS may determine that the
rules of subchapter C of chapter 63 do not apply to the Contribution
and make a determination about the Contribution (which is a
partnership-related item under Sec. 301.6241-1(a)(6)(v)(C)) as part of
an adjustment to A's adjusted basis in its interest in Partnership
(which is not a partnership-related item). The IRS may make this
determination because Partnership's reported basis in Asset was based
on the information provided by A. Because A's adjusted basis in A's
interest in Partnership is reduced to $30, the total gain from the sale
of A's interest in Partnership is increased to $70 ($50 as originally
reported plus $20 as adjusted by the IRS). In accordance with paragraph
(h)(2) of this section, if A's basis in its interest in Partnership is
adjusted based on a determination about the Contribution, Partnership
and the other partners of Partnership are not bound by any
determination regarding the Contribution resulting from the examination
of A and no adjustment is required to be made to their returns under
this section.
(c) Termination and jeopardy assessment. For any taxable year of a
partner or indirect partner for which an assessment of income tax under
section 6851 or section 6861 is made, the IRS may adjust any
partnership-related item with respect to such partner or indirect
partner as part of making an assessment of income tax under section
6851 or section 6861 without regard to subchapter C of chapter 63.
(d) Criminal investigations. For any taxable year of a partner or
indirect partner for which the partner or indirect partner is under
criminal investigation, the IRS may adjust any partnership-related item
with respect to such partner or indirect partner without regard to
subchapter C of chapter 63.
(e) Indirect methods of proof of income. The IRS may adjust any
partnership-related item as part of a determination of any deficiency
(or portion thereof) of the partner or indirect partner that is based
on an indirect method of proof of income without regard to subchapter C
of chapter 63.
(f) Special relationships and extensions of the partner's period of
limitations. If the period of limitations under section 6235 on making
partnership adjustments has expired for a taxable year, the IRS may
adjust any partnership-related item that relates to any item or amount
for which the partner's period of limitations on assessment of tax
imposed by chapter 1 of the Code (chapter 1) has not expired for the
taxable year of the partner or indirect partner, without regard to
subchapter C of chapter 63 if--
(1) The direct or indirect partner is related to the partnership
under section 267(b) or 707(b); or
(2) Under section 6501(c)(4), the direct or indirect partner
agrees, in writing, to extend the partner's section 6501 period of
limitations on assessment for the taxable year but only if the
agreement expressly provides that the partner is extending the time to
adjust and assess any tax attributable to partnership-related items for
the taxable year.
(g) Penalties and taxes imposed on the partnership under chapter 1.
The IRS may adjust any tax, penalties, additions to tax, or additional
amounts imposed on, and which are the liability of the partnership
under chapter 1 without regard to subchapter C of chapter 63. The IRS
may also make determinations about any partnership-related item,
without regard to subchapter C of chapter 63, as part of any adjustment
made to the amount and applicability of the tax, penalty, addition to
tax, or additional amount imposed on the partnership being determined
without regard to subchapter C of chapter 63. Any determinations under
this paragraph (g) will be treated as a determination under a chapter
of the Code other than chapter 1 for purposes of Sec. 301.6241-6.
(h) Determination that subchapter C of chapter 63 does not apply--
(1) Notification. If the IRS determines, in accordance with paragraph
(b), (c), (d), (e), (f), or (g) of this section, that some or all of
the rules under subchapter C of chapter 63 do not apply to any
partnership-related item (or portion
[[Page 75495]]
thereof), then the IRS will notify, in writing, the taxpayer to whom
the adjustments are being made.
(2) Effect of adjustments not made under subchapter C of chapter
63. Any final decision with respect to any partnership-related item
adjusted in a proceeding not under subchapter C of chapter 63 is not
binding on any person that is not a party to the proceeding. For
example, if the partnership or any other partner does not become a
party to a partner-level proceeding conducted as a result of the
application of this section, the partnership and those other partners
are not bound to the adjustments determined in the partner-level
proceeding.
(i) Coordination with adjustments made at the partnership level.
This section will not apply to the extent the partner can demonstrate
adjustments to partnership-related items included in the deficiency or
an adjustment by the IRS were--
(1) Previously taken into account under subchapter C of chapter 63
by the person being examined; or
(2) Included in an imputed underpayment paid by a partnership (or
pass-through partner) for any taxable year in which the partner was a
reviewed year partner or indirect partner but only if the amount
included in the deficiency or adjustment exceeds the amount reported by
the partnership to the partner that was either reported by the partner
or indirect partner or is otherwise included in the deficiency or
adjustment determined by the IRS.
(j) Applicability date--(1) In general. Except for paragraph (b) of
this section, this section applies to partnership taxable years ending
on or after November 20, 2020. Notwithstanding the preceding sentence,
upon agreement between the partner under examination and the IRS, any
provision of this section except for paragraph (b) of this section may
apply to any taxable year of a partner that relates to a partnership
taxable year subject to subchapter C of chapter 63 (as amended) that
ended before November 20, 2020. In addition, a partnership and the IRS
may agree to apply paragraph (g) to any partnership taxable year ended
before November 20, 2020, that is subject to subchapter C of chapter
63, as amended.
(2) Partnership-related items underlying items that are not
partnership-related items. Paragraph (b) of this section applies to
partnership taxable years beginning after December 20, 2018.
Notwithstanding the preceding sentence, upon agreement between the
partner under examination and the IRS, paragraph (b) of this section
may apply to any taxable year of a partner that relates to a
partnership taxable year subject to subchapter C of chapter 63, as
amended, that ended on or before December 20, 2018.
Melanie R. Krause,
Acting Deputy Commissioner for Services and Enforcement.
Approved: November 15, 2022.
Lily Batchelder,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2022-26783 Filed 12-8-22; 8:45 am]
BILLING CODE 4830-01-P
</pre></body>
</html>Indexed from Federal Register on December 9, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.