Partnership Audit Rules for the Next Decade

Not effective until partnership tax years beginning in 2018, the new audit procedures are unlikely to be put into practice before 2020, for returns filed in 2019. However, partnerships may elect to adopt the rules for any tax year beginning after the date of the statute's enactment, Nov. 2, 2015, so professionals need to understand these rules now. In any case, due diligence calls for partners and their advisers to immediately review their partnership agreements to determine what should be changed now to take into account the new rules when they become generally effective.

Reasons for Change

The TEFRA rules for auditing partnerships were enacted in 1982 to facilitate IRS audits, including those of mass-marketed tax shelter partnerships, which after 1986 largely disappeared as a result of the passive activity loss rules. However, over the last two decades, growth in the number and size of large partnerships has created new challenges to the IRS's ability to audit these entities. In 1997, to address the complexity of the TEFRA rules, Congress created an elective regime allowing partnerships with 100 or more partners to pay tax, interest, and penalties on adjustments to the partnership return.³ But by 2013, only 91 of the 10,948 partnerships with more than 100 partners had elected these rules.⁴

In July 2014, the U.S. Government Accountability Office (GAO) reported that the number of large partnerships (defined as those with at least $100 million in assets and at least 100 direct or indirect partners) more than tripled from 2002 to 2011, but only 0.8% of such entities were audited by the IRS, compared with 27.1% of comparable large corporations.⁵ The GAO noted that under the TEFRA rules, passing partnership adjustments through to the partners was a costly and inefficient process, particularly in the case of multitiered structures.⁶

In response to these concerns, Reps. Jim Renacci, R-Ohio, and Ron Kind, D-Wis., both members of the House Ways and Means Committee, introduced H.R. 2821, the Partnership Audit Simplification Act of 2015. This bill, with substantial modification, became the basis of the new partnership audit rules adopted by the Budget Act last November. But because the estimated additional revenue from the changes was essential to the passage of the overall Budget Act, the public had little opportunity to comment on the proposal.⁷ Fortunately, however, the new rules do not become generally effective until after 2017,⁸ allowing time for issues to be identified and for the IRS, Treasury, and, if necessary, Congress, to provide clarification and guidance.⁹

A New Approach

TEFRA addressed a problem of applying partnership adjustments to multiple partners in separate proceedings by specifying that the tax treatment of "partnership items," including underpayments of tax and penalties arising from them, is determined at the partnership level, in a unified proceeding binding upon all partners.¹⁰ Fresh controversies erupted, however, over defining and clarifying which items were partnership items and which were partner-level items.

The Budget Act dispensed with the partnership-item criterion in favor of determining any adjustment to items of income, gain, loss, deduction, or credit of all partnerships at the partnership level, with the partnership, rather than partners, generally liable for any resulting imputed underpayment. However, in certain cases partnerships will be able to elect out of the new rules.

Electing Out of the New Rules

While the new audit and adjustment rules apply to all partnerships for tax years after 2017, certain partnerships will be able to elect out of the regime. Upon electing out for a tax year, the partnership is subject to the general rules for the assessment and collection of tax deficiencies. Therefore, any adjustment to partnership taxable income will flow through to the partners with the assessment of tax, and the statute of limitation for the assessment will be determined at the partner level, perhaps resulting in inconsistent treatment among the partners. Similarly, partners will make any extension of a statute of limitation, settlement agreement, notice of deficiency, petition to the Tax Court, or suit for a refund individually on a partner-by-partner basis.

Since this is an annual election, a partnership may elect out in some years and not in other years. A partnership may elect out, under procedures to be issued, for a year if:

• The partnership is required to issue no more than 100 Schedules K-1, Partner's Share of Income, Deductions, Credits, etc., to its partners;¹¹
• Each partner is an individual, an estate of a deceased partner, an S corporation, a C corporation, or a foreign entity that would be treated as a C corporation if it were domestic;¹²
• An election is filed with a timely filed return identifying the names and identification numbers of the partners;¹³ and
• The partnership notifies each partner of the election.¹⁴

Thus, a partnership that has as a partner another partnership or a trust, including a grantor trust, may not elect out. Furthermore, any partnership with a tax-exempt organization as a partner will need to determine whether the entity is a C corporation or trust for purposes of eligibility to elect out.

Where an S corporation is a partner, the names and taxpayer identification numbers of the S corporation's shareholders must be included with the election statement, and the Schedules K-1, Shareholder's Share of Income, Deductions, Credits, etc., of the S corporation's shareholders (as well as the S corporation itself) count in measuring the 100-partner limit.¹⁵ Most important, the IRS is authorized to issue similar rules allowing partnerships to elect out regardless of the type of entities owning a partnership interest, as long as the total number of Schedules K-1 required to be issued by the partnership and its partners do not exceed 100 and the partnership discloses the identities of indirect partners.¹⁶

Example 1: A partnership, L, has 50 partners, 49 of whom are individuals and one of which is another partnership, U. U has 50 partners who are all individuals. Under the statute, L may not elect out. However, the statute authorizes regulations similar to the rules for S corporations, and such regulations could provide that if the sum of L's direct and indirect partners, including U, does not exceed 100, L may elect out of the new audit rules.¹⁷

An issue that regulations will have to clarify is the treatment of multiple Schedules K-1 issued to the same partner, representing different classes of interest. Thus, where an individual receives a Schedule K-1 for his or her general partnership interest and a separate Schedule K-1 for his or her limited partnership interest in the same partnership, it is unknown whether both schedules will count toward the 100-partner limit. Also, a transfer of a partnership interest will create two Schedules K-1 with respect to that interest if the transferee partner did not already hold an interest in the partnership at the time of transfer.¹⁸

For determining whether a foreign entity is a C corporation for purposes of the election out, the regulations defining when a foreign entity is to be treated as a corporation for U.S. tax purposes apply. They provide that, absent an entity classification election, only certain per se corporations will be treated as corporations and identify one or more such entities for each of 87 countries.¹⁹ Other foreign entities may become a qualified partner for the election out if they check the box on Form 8832, Entity Classification Election, to be treated as a domestic corporation. But if the foreign entity in a subsequent year elects not to be a corporation by filing a second Form 8832, the partnership may not elect out of the new audit rules for that year.²⁰

Finally, regulations will need to make clear whether a disregarded entity or nominee holding an interest will be disregarded in determining who owns the interest.²¹ Similarly, regulations will need to clarify whether a partnership interest held by an individual retirement account (IRA), simplified employee pension (SEP) plan, or other closely held retirement entity will be treated as owned by the individual beneficiary.

Consistency Requirement

Similar to the TEFRA rules,²² partners must treat all items of income, deduction, credit, etc., on their returns in a manner consistent with the treatment of such items on the partnership return.²³ If a partner does not treat items consistently, any underpayment of tax attributable to such failure will be treated as a mathematical or clerical error, enabling the IRS to immediately begin collection without having to issue a notice of deficiency.²⁴ However, where the partner files a statement with its return identifying the inconsistency, the inconsistent treatment will not be considered a mathematical or clerical error, entitling the partner to a notice of deficiency and ultimate court review.²⁵

Adjustments at the Partnership Level

As stated above, absent an election out, all adjustments to the partnership's income, gain, loss, deduction, or credits are made at the partnership level.²⁶ The IRS will only notify the partnership and its "partnership representative" (further described below) of any audit or proposed adjustments and will ultimately issue a "notice of final partnership adjustment," which will not be mailed earlier than 270 days after the date the proposed adjustment is mailed.²⁷ All notices are sufficient if mailed to the last known address of the partnership representative or partnership, even if the partnership has terminated.²⁸ If the partnership seeks judicial review of a final notice, the IRS may not issue further notices in the absence of fraud, malfeasance, or misrepresentation of material fact.²⁹ The IRS may rescind a notice, with the partnership's consent and understanding that the rescission does not entitle the partnership to judicial review.³⁰

Within 90 days after the date of mailing of a notice of final partnership adjustment, the partnership (i.e., the partnership representative) may petition the Tax Court, district court for the district in which the partnership's principal place of business is located, or the Court of Federal Claims.³¹

Upon the expiration of 90 days after the mailing of the notice of final partnership adjustment, or if a petition is filed, upon the decision of a court being final, the IRS will assess and collect any tax, interest, or penalties relating to the adjustment at the partnership level. For a net adjustment increasing the partnership's taxable income for a year under audit (the "reviewed year"),³² the partnership is required to pay any additional tax (the "imputed underpayment")³³ in the year that the adjustment is finalized (the "adjustment year").³⁴

Example 2: A partnership timely files its calendar-year 2018 return on March 15, 2019. The IRS adjusts the partnership's 2018 taxable income (the reviewed year), issuing a notice of final partnership adjustment in 2020 (the adjustment year). Any imputed underpayment attributable to the adjustment is payable by the partnership no later than the due date of its 2020 tax return.

If the partnership no longer exists when a partnership adjustment takes effect, the adjustment is taken into account by its former partners.³⁵

Finally, an adjustment that does not result in an imputed underpayment is taken into account by the partnership in the adjustment year as a reduction in nonseparately stated income or an increase in nonseparately stated loss.³⁶ Treating the adjustment as a nonseparate item results in ordinary income or loss, changing the partnership's net taxable income, while any adjustment to a credit is treated as a separately stated item directly changing the partnership's tax.³⁷

Imputed Underpayment

The imputed underpayment payable by the partnership is the result of netting all adjustments of income, gain, loss, or deduction for the reviewed year and multiplying the net amount by the "highest rate of tax in effect for the reviewed year under section 1 or 11" (i.e., the higher of the highest individual or corporate rate).³⁸ Thus, the 39.6% individual rate applies even if all the partners are C corporations, for which the highest marginal rate is 35%. There is no provision for collecting self-employment tax or net investment income tax that might otherwise arise if the adjustment were passed through to the partners.

Example 3: In 2020 (the adjustment year), the IRS issues a notice of final partnership adjustment increasing the partnership's taxable income for 2018 (the reviewed year) by $1 million. If the partnership representative does not petition the Tax Court or sue in district court or the Court of Federal Claims, the partnership, not its partners, is subject to $396,000 in income tax (the imputed underpayment), plus interest and possible penalties, assessable 90 days after the date of mailing of the notice.

The imputed underpayment rate does not take into account the character of the income, so that capital gains or qualified dividends are taxed at the same 39.6% rate. To mitigate this result, the IRS is authorized to establish procedures that:

• Adjust the imputed underpayment to reflect amounts reported on returns filed by one or more partners for the reviewed year if any tax due to the adjustments is paid with the returns;³⁹
• Determine the imputed underpayment taking into account the portion of the adjustment allocable to a tax-exempt partner;⁴⁰
• Take into account lower tax rates with respect to adjustments allocable to a C corporation or to an individual or S corporation in the case of capital gain or a qualified dividend;⁴¹
• If the imputed underpayment is attributable to the adjustment of more than one item, and any partner's distributive share is not the same for any items, then the portion of the imputed underpayment to which the lower rate applies is determined by reference to the partner's distributive share of net gain or loss as if the partnership had sold all its assets at their fair market value at the end of the reviewed year;⁴² and
• Allow for adjustments to the imputed underpayment for allocation of certain passive activity losses to partners of publicly traded partnerships.⁴³

The IRS is further authorized to provide for other circumstances for modifying the imputed underpayment.⁴⁴ Thus, for example, future regulations could take into account tax attributes of a partner, e.g., net operating losses (NOLs), capital losses, and excess credits; the portion of an adjustment allocated to that partner; and adjustments shifting income among partners subject to different tax rates on capital gain and qualified dividends.

The partnership must pay the imputed underpayment no later than the due date (determined without regard to extensions) of its tax return.⁴⁵ Interest is imposed on the payment for the period beginning on the day after the return due date for the reviewed year and ending on the return due date for the adjustment year or, if earlier, the date payment is made.⁴⁶ Penalties attributable to the imputed underpayment are determined at the partnership level and are paid by the partnership.⁴⁷ Additional interest and penalties are imposed on the partnership for failure to timely pay the imputed underpayment.⁴⁸

The partnership cannot take a deduction, even for interest, for any payment it makes;⁴⁹ but, presumably, after a partner's basis is increased for its share of any adjustment to income, the partner's basis is reduced for the share of the payment made.

Finally, although it is beyond the scope of this article, consideration should be given to whether a possible imputed underpayment is an income tax of the partnership calling for a provision for income taxes on the partnership's financial statements. In accordance with FASB Accounting Standards Codification Topic 740, Income Taxes, no provision will be required until the new law takes effect in 2018, but for partnerships needing financial statements that conform with U.S. GAAP, this issue may be more important than treatment of an imputed underpayment under the Internal Revenue Code.

Payment by Partners

In lieu of paying the tax itself, a partnership may elect within 45 days after receiving a notice of final partnership adjustment for a reviewed year to furnish each partner in the reviewed year a statement (presumably, a revised Schedule K-1) of the partner's share of the adjustment.⁵⁰ In this case, the partner will then self-assess any added tax computed as if the adjustment had been properly reported for the reviewed year, but the assessment is reported and paid on the return for the year the revised Schedule K-1 is received.

Example 4: The same facts apply as in the preceding example, except the partnership elects within 45 days after receiving the notice to issue statements to each partner for the reviewed year indicating each partner's share of the $1 million of additional income. Each partner will adjust its 2018 taxable income to determine the additional tax, which is then paid on the partners' 2020 returns.

Interest on the additional tax to the partner is determined from the due date of the partner's return for the reviewed year at a rate two percentage points higher than the general interest rate on underpayments, i.e., the short-term applicable federal rate plus five percentage points.⁵¹ Thus, there is an additional interest charge for having the reviewed-year partners, rather than the partnership, pay the imputed underpayment.

Partners who revise their tax liability for the reviewed year must also adjust subsequent-year tax attributes to reflect those adjustments.⁵² For example, where a partner sold its interest between the reviewed year and the adjustment year, the partner's basis in the partnership may be affected, changing the gain or loss from the sale in the subsequent year. Other tax attributes, such as NOL carryovers, suspended passive activity losses, at-risk amounts, etc., for years subsequent to the reviewed year may also need redetermination.

A problem with this alternative arises in the case of a lower-tier partnership issuing an adjusted Schedule K-1 to an upper-tier partnership that would then be responsible for payment of the tax attributable to the partnership. Although the upper-tier partnership might be able to use the administrative adjustment request provisions discussed below to "push out" its share of an adjustment from a lower-tier partnership that elected this alternative, no administrative guidance currently would permit this approach.⁵³

This alternative will likely be elected by partnerships where the partners' interests vary from year to year, so that the burden for the imputed underpayment will fall upon those who were partners in the reviewed year, according to their respective interests in that year. Also, this alternative may be necessary where the partnership itself has insufficient cash to pay the imputed underpayment. However, the additional administrative and compliance costs, particularly in multi­tiered structures, as well as the higher interest rate on the underpayment, must be taken into account.

Administrative Adjustment Request

Instead of the IRS's changing the partnership's income and issuing a notice of final partnership adjustment, the partnership itself may, similarly to under the TEFRA rules, file an "administrative adjustment request" (AAR) to adjust its taxable income.⁵⁴ When a partnership files an AAR for a prior tax year, it takes the adjustment into account in the tax year the AAR is filed, not the prior year.⁵⁵ Any payment of tax arising from the adjustment is made using either the partnership-level payment provisions or rules similar to the alternative available for payment of tax by the partners for a partnership-level adjustment made by the IRS. Thus, the partnership addresses the change to its taxable income either by paying a tax itself or by issuing adjusted Schedules K-1, with the tax paid by the partners with their returns for the current year without the filing of amended returns.

A partnership paying tax with an AAR may not reduce that tax for any amount paid by partners who filed amended returns reflecting their share of the adjustment.⁵⁶ If the partnership elects to have the partners pay the imputed underpayment or if there is a reduction in partnership taxable income, the statute is silent as to whether the partners of the year to which the AAR applies or the partners of the year the AAR is filed receive the benefit or bear the burden of the adjustment.The statute is equally silent regarding the rights of a partnership to sue for a refund if the IRS does not respond to the AAR.

Partnership Representative

A partnership that does not elect out of the new audit regime must designate (in a manner to be prescribed by the IRS) a partner or another person with a substantial presence in the United States as the partnership representative, and if no person is so designated by the partnership, the IRS may select any person as the partnership's representative.⁵⁷ The partnership representative has sole authority to act on behalf of the partnership and may bind the partnership and all partners in IRS audits as well as in any court proceeding.⁵⁸

Therefore, unlike under prior law, the IRS will no longer be obligated to provide any notices to anyone other than the partnership representative, who no longer needs to be a partner. Consequently, the partners will need to carefully consider whom they wish to appoint to this position, presumably by designating the person on the tax return.

Statute of Limitation

Adjustments under these new rules may not be made to a partnership tax year more than three years after the latest of:

• The date the partnership return for the year was filed;⁵⁹
• The return due date, including extensions;⁶⁰ or
• The date the partnership files an AAR for the tax year.⁶¹

In addition, the period for adjustment remains open for 270 days after the date an imputed underpayment is changed and the partnership makes all required submissions to the IRS⁶² and for 330 days after the date of any notice of proposed partnership adjustment.⁶³ Furthermore, the statute is tolled during any period during which the partnership could file a petition in court and, if such a petition is filed, until the date the decision of the court becomes final and for one year thereafter.⁶⁴

The taxpayer and the IRS may extend any statute of limitation by agreement,⁶⁵ and the general rules apply that allow an unlimited period to assess tax for false returns or cases where no return is filed.⁶⁶ In addition, the statute is extended to six years where the partnership underreports its gross income by more than 25%.⁶⁷

Effective Date

These rules governing partnership audits, including AARs, are generally effective for partnership tax years beginning after Dec. 31, 2017.⁶⁸ However, a partnership may elect under procedures to be prescribed by the IRS to apply the new provisions (other than the election-out rules) to any tax year beginning after Nov. 2, 2015, and before Jan. 1, 2018.⁶⁹

What Partnerships and Their Advisers Need to Consider Now

While regulations and other guidance will be forthcoming over the next 12 to 18 months, existing partnerships or anyone considering forming a partnership or acquiring an interest in an existing entity needs to consider the following issues:

Election out: Should the partnership agreement be amended or drafted to require an election out if the partnership qualifies for the election? Should the partnership agreement prohibit transfers of partnership interests to persons who would terminate or prohibit an election out?

Partner indemnification of partnership payments: Should the partnership agreement require the partners of the reviewed year to reimburse the partnership for imputed underpayments made by the partnership in the adjustment year when the partners for the reviewed year and the adjustment year are not the same?

New partner: Should a purchaser of a partnership interest or other partner who did not own a partnership interest in a reviewed year be directly or indirectly liable for tax paid by the partnership for that year? In any event, anyone considering the purchase of an interest in a partnership or investing in a partnership should seek information from the partnership representative about any potential tax obligations for prior years.

Alternative payment election: Should the partnership agreement describe the circumstances under which the partnership will elect to shift the burden for an adjustment from the partnership to the partners? Presumably, the partnership must either pay the entire imputed underpayment itself or pass the entire adjustment through to its partners.

Partnership representative: What procedures should a partnership establish for selecting a partnership representative? Who will have the authority to designate that person? Should the partnership agreement appoint a partner or partners to direct or otherwise guide the decisions of the partnership representative once that person is selected?

Conclusion

Because actual audits for a tax year after 2017 will not likely arise until the next decade, the IRS has time to provide guidance regarding this legislation.⁷⁰ Initially, the Service will likely issue a notice describing the procedures for a partnership to elect to be subject to the new rules for its 2016 and 2017 tax years. However, until the IRS issues regulations clarifying the imputed underpayment rules and the alternative for allocating adjustments to partners, making such an election may be problematic. In any event, partners and their tax advisers need to immediately review the impact of these new rules on their partnership agreements and determine if amendments to those agreements are needed.  

Footnotes

¹Tax Equity and Fiscal Responsibility Act of 1982, P.L. 97-248.

²Section 1101 of the Bipartisan Budget Act of 2015, P.L. 114-74, enacted Nov. 2, 2015, replacing Secs. 6221 through 6255 and Secs. 771 through 777 with new Secs. 6221 through 6241, all for partnership tax years beginning after 2017. Hereinafter, unless otherwise specified, all references to these Code sections are as provided under the Bipartisan Budget Act.

³Taxpayer Relief Act of 1997, P.L. 105-34, §1221.

⁴DeCarlo and Shumofsky, "Partnership Returns, 2013," Statistics of Income Bulletin, 7 (Fall 2015).

⁵U.S. Government Accountability Office, Large Partnerships: Growing Population and Complexity Hinder Effective IRS Audits (GAO-14-746T), testimony of James R. White, GAO director of strategic issues, before the Permanent Subcommittee on Investigations of the U.S. Senate Committee on Homeland Security and Governmental Affairs, July 22, 2014.

⁶U.S. Government Accountability Office, Large Partnerships: With Growing Number of Partnerships, IRS Needs to Improve Audit Efficiency (GAO-14-732) (September 2014).

⁷The new rules governing partnership audits, adjustments, and collection are estimated to raise approximately $9.325 billion over the fiscal-year 2016-2025 budget cycle. See Joint Committee on Taxation, Estimated Revenue Effects of the Tax Provisions Contained in H.R. 1314, the "Bipartisan Budget Act of 2015" (JCX-135-15) (Oct. 28, 2015).

⁸Bipartisan Budget Act §1101(g).

⁹In fact, Section 411 of the Protecting Americans From Tax Hikes Act of 2015 (Division Q of the Consolidated Appropriations Act, 2016, P.L. 114-113) has already amended Sec. 6225(c) regarding the treatment of losses from publicly traded partnerships in connection with the partnership's payment of tax.

¹⁰Sec. 6221 before repeal by the Bipartisan Budget Act; Regs. Sec. 301.6221-1.

¹¹Sec. 6221(b)(1)(B). Under law in effect before 2018, to be excluded from the TEFRA rules, a partnership must not have more than 10 partners, each of which must be an individual, C corporation, or estate of a deceased partner (current Sec. 6231(a)(1)(B)).

¹²Sec. 6221(b)(1)(C).

¹³Sec. 6221(b)(1)(D).

¹⁴Sec. 6221(b)(1)(E).

¹⁵Sec. 6221(b)(2)(A).

¹⁶Sec. 6221(b)(2)(C).

¹⁷See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 2015 (JCS-1-16), at 59-60 (March 2016).

¹⁸Sec. 706(c)(2)(A) provides that the tax year of a partner closes with respect to the partnership when the partner disposes of its entire interest. Thus, in the year of transfer, two Schedules K-1 must be issued, one to the transferor and a second to the transferee who was not already a partner.

¹⁹Regs. Sec. 301.7701-2(b)(8).

²⁰See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 2015 (JCS-1-16), at 58 (March 2016), stating that only foreign corporations treated as per se corporations under the check-the-box rules of Regs. Secs. 301.7701-2 and -3 meet the eligibility requirement to elect out.

²¹Id. at 60, stating that a corporation and a disregarded entity it owns that is a partner are both counted in the 100-partner limit for electing out. The Joint Committee on Taxation also makes clear that regulations may provide similar guidance for an individual with a grantor trust that is a partner.

²²See Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR).

²³Sec. 6222(a).

²⁴Secs. 6222(b) and 6232(d)(1)(A). Normally, under Sec. 6213(a), the IRS must issue a notice of deficiency allowing the taxpayer 90 days to petition the Tax Court for a redetermination of the deficiency. However, Sec. 6213(b)(1) allows for immediate correction for math errors, subject to an abatement request under Sec. 6213(b)(2). However, no abatement request can be made by a partnership that is a partner in another partnership (Sec. 6232(d)(1)(B)).

²⁵Sec. 6222(c). Additionally, if a partner receives incorrect information from the partnership, the partner may elect to demonstrate to the satisfaction of the IRS that the treatment of the item on the return is consistent with the treatment of the item on the Schedule K-1 (Sec. 6222(c)(2)).

²⁶Sec. 6221(a).

²⁷Sec. 6231(a).

²⁸Id.

²⁹Sec. 6231(b).

³⁰Sec. 6231(c).

³¹Sec. 6234(a). For any petition to a district court or the Court of Federal Claims, the partnership must deposit with the IRS the imputed underpayments (Sec. 6234(b)(1)). Any deposit is not treated as payment of tax, but interest will be paid if the deposit is refunded (Sec. 6234(b)(2)). This procedure differs from that of other taxpayers seeking review in these courts, in that normally the tax is actually paid, not merely deposited, by the taxpayer, who must then show that a request for refund of the tax was denied.

³²Sec. 6225(d)(1).

³³Sec. 6225(a)(1).

³⁴Sec. 6225(d)(2).

³⁵Sec. 6241(7).

³⁶Sec. 6225(a)(2)(A), referring to Sec. 702(a)(8).

³⁷Sec. 6225(a)(2)(B).

³⁸Sec. 6225(b)(1).

³⁹Sec. 6225(c)(2).

⁴⁰Sec. 6225(c)(3).

⁴¹Sec. 6225(c)(4)(A). In the initial legislation, the IRS was authorized to establish procedures extending only to ordinary income of a C corporation, but a subsequent technical correction makes clear the authority also extends to a corporation's capital gain (Protecting Americans From Tax Hikes Act, §411(a)(1)).

⁴²Sec. 6225(c)(4)(B).

⁴³Sec. 6225(c)(5).

⁴⁴Sec. 6225(c)(6).

⁴⁵Sec. 6232(a).

⁴⁶Secs. 6233(a)(1) and (2).

⁴⁷Sec. 6233(a)(3).

⁴⁸Sec. 6233(b).

⁴⁹Sec. 6241(4).

⁵⁰Sec. 6226(a).

⁵¹Sec. 6226(c)(2). Although unlikely, if an IRS adjustment to the reviewed year results in a partner's being due a refund, there is no provision allowing for the payment of interest on the overpayment, indicating the need for a technical amendment.

⁵²Sec. 6226(b)(2)(B).

⁵³The Joint Committee on Taxation states that if the partners for the reviewed year indemnified the partnership for the tax, the payments would not be deductible. Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 2015 (JCS-1-16), at 70 (March 2016).

⁵⁴Sec. 6227(a). Under TEFRA, a partnership submits an AAR by filing Form 1065X, Amended Return or Administrative Adjustment Request (AAR), or Form 8082.

⁵⁵Sec. 6227(b).

⁵⁶Id.

⁵⁷Sec. 6223(a).

⁵⁸Sec. 6223(b).

⁵⁹Sec. 6235(a)(1).

⁶⁰Sec. 6235(a)(1)(B).

⁶¹Sec. 6235(a)(1)(C).

⁶²Sec. 6235(a)(2).

⁶³Sec. 6235(a)(3). Where the IRS has granted additional time to submit information to modify an imputed underpayment beyond the 270-day period from the date of the mailing of a proposed partnership adjustment under Sec. 6225(c)(7), Sec. 6235(a)(3) similarly extends the statute of limitation.

⁶⁴Sec. 6235(d).

⁶⁵Sec. 6235(b).

⁶⁶Secs. 6235(c)(1) and (3).

⁶⁷Sec. 6235(c)(2), cross-referencing Sec. 6501(e)(1)(A).

⁶⁸Bipartisan Budget Act §§1101(g)(1) and (2).

⁶⁹Bipartisan Budget Act §1101(g)(4).

⁷⁰See Notice 2016-23, requesting comment on a wide range of issues for which the IRS expects to issue guidance.

	Contributor
	Donald Williamson is a professor of taxation, the Howard S. Dvorkin Faculty Fellow, and executive director of the Kogod Tax Center at the Kogod School of Business at American University in Washington. To comment on this article, contact thetaxadviser@aicpa.org.