In-Depth: Appropriations Act Makes Major Modifications to the Partnership Audit Rules

(Parker Tax Publishing April 2018)

The Consolidated Appropriations Act of 2018 (CAA), which was signed into law on March 23, 2018, contains numerous modifications, corrections, and clarifications relating to the centralized partnership audit regime rules that were enacted in the Bipartisan Budget Act of 2015 (2015 BBA) and which apply generally to partnership tax years beginning after 2017. Among the many changes, CAA revises the definition of a partnership adjustment and adds a new term - "partnership-related item." Under CAA, a new procedure is introduced - a "pull-in" procedure - as an alternative procedure to filing amended returns relating to an imputed underpayment of tax. The changes to the partnership audit regime rules are effective as if included with the partnership audit provision enacted in the 2015 BBA. Pub. L. 115-141.

Observation: CAA also contains numerous technical tax corrections, including a change to fix the "grain glitch." For more information, See President Signs $1.3 Trillion Spending Bill That Includes Technical Tax Corrections

I. Scope of Adjustments Subject to Partnership Audit Rules

CAA clarifies the scope of the partnership audit rules. It eliminates references to adjustments to partnership income, gain, loss, deduction, or credit, and instead refers to partnership-related items, defined as any item or amount with respect to the partnership that is relevant in determining the income tax liability of any person, without regard to whether the item or amount appears on the partnership's return and including an imputed underpayment and an item or amount relating to any transaction with, basis in, or liability of, the partnership. Thus, the partnership audit rules are not narrower than the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) partnership audit rules, but rather, are intended to have a scope sufficient to address those items described as partnership items, affected items, and computational items in the TEFRA context in regulations in 301.6231(a)(3), 301.6231(a)(5), and 301.6231(a)(6), as well as any other items meeting the statutory definition of a partnership-related item.

For example, because a partnership-related item includes an item or amount relating to any transaction with the partnership, an item or amount relating to a partner's transaction with a partnership other than in his capacity as a member of the partnership (which is considered as occurring between the partnership and one who is not a partner under Code 707) is a partnership-related item. As another example, because a partnership-related item includes an item or amount relating to basis in the partnership, an item or amount relating to the determination of the adjusted basis of a partner's interest in the partnership or relating to the basis of the partnership in partnership property is a partnership-related item. As a further example, because a partnership-related item includes an item or amount relating to liability of the partnership, an item or amount relating to the determination of partnership liabilities or to the effect on a partner of a decrease or increase in a partner's share of partnership liabilities is a partnership-related item.

CAA clarifies that the partnership audit rules do not apply to taxes imposed, or to amounts required to be deducted or withheld, under Code chapters 2 (tax on self-employment income) or 2A (tax on net investment income), 3 (withholding tax on nonresident alien individuals or foreign corporations), or 4 (withholding tax for certain foreign accounts), except as otherwise specifically provided. However, any partnership adjustment determined under the income tax is taken into account for purposes of determining and assessing tax under these chapters of the Code to the extent that the partnership adjustment is relevant to the determination. The period for assessing any tax under chapter 2 or 2A that is attributable to a partnership adjustment does not expire before the date that is one year after (1) in the case of an adjustment pursuant to the decision of a court in a proceeding brought under Code Sec. 6234, such decision becomes final, or (2) in any other case, 90 days after the date on which the notice of final partnership adjustment is mailed under Code Sec. 6231.

CAA applies a specific timing rule in the case of any tax imposed, including any amount that is required to be deducted or withheld, under chapter 3 (withholding tax on nonresident alien individuals or foreign corporations) or 4 (withholding tax for certain foreign accounts). In these cases, the tax is determined with respect to the reviewed year. The tax is imposed with respect to the adjustment year; similarly, the amount required to be deducted or withheld is deducted or withheld with respect to the adjustment year. The reviewed year and the adjustment year are defined in Code Sec. 6225(d).

In determining the amount of any deficiency, adjustments to partnership-related items are made only as provided under the partnership audit rules, except to the extent otherwise provided. Thus, CAA clarifies that the court has jurisdiction to determine all partnership-related items of the partnership for the partnership tax year to which the notice of final partnership adjustment relates, the proper allocation of such items among the partners, and the applicability of any penalty, addition to tax, or additional amount for which the partnership may be liable. For example, because partnership-related items include items or amounts with respect to (1) Code Sec. 707 transactions; (2) liabilities of the partnership and the partners' shares of the liabilities; and (3) the basis of a partnership interest or of partnership property, determination of these items or amounts is within the scope of judicial review.

II. Netting in the Determination of Imputed Underpayments

When the IRS makes adjustments to any partnership-related item with respect to the reviewed year of a partnership, if the adjustments result in an imputed underpayment, the partnership pays an amount equal to the imputed underpayment, and if the adjustments do not result in an imputed underpayment, the adjustments are taken into account by the partnership in the adjustment year and passed through to the adjustment year partners. CAA clarifies this rule by conforming the language referring to partnership-related items and by striking erroneous references to separately stated income or loss.

CAA also clarifies the manner of netting items to determine the amount of an imputed underpayment of a partnership. It clarifies that items of different character (capital or ordinary), for example, are not netted together in determining the amount of an imputed underpayment. Rather, an imputed underpayment of a partnership with respect to a reviewed year is determined by the IRS by appropriately netting partnership adjustments for that year and by applying the highest rate of individual or corporate tax in effect for the reviewed year. In the case of partners' distributive shares, like items within categories under Code Sec. 702(a)(1)-(8) are separately netted.

In determining an imputed underpayment, any adjustment that reallocates the distributive share of any item from one partner to another is taken into account by disregarding any part of the adjustment that results in a decrease in the amount of the imputed underpayment. For example, this rule could be implemented by disregarding the decrease in any item of income or gain and disregarding the increase in any item of deduction, loss, or credit.

Limitations that would apply at the direct or indirect partner level are treated as applying, unless otherwise determined. Under the provision, if an adjustment would decrease the imputed underpayment, and could be subject to a limitation or not be allowed against ordinary income if the adjustment were taken into account by any person, then the adjustment is not taken into account in determining the imputed underpayment of the partnership, except to the extent the IRS otherwise provides.

For example, if an adjustment would increase the amount of a partnership loss allocable to partners, but the loss could be subject to the passive loss rule of Code Sec. 469 in the hands of direct and indirect partners of the partnership, then the IRS does not take into account the adjustment increasing the loss in determining the amount of the partnership's imputed underpayment, unless the IRS provides otherwise. For example, the IRS may provide otherwise if the partnership supplies accurate information that all direct and indirect partners of the partnership are publicly traded domestic C corporations not subject to the passive loss rule.

Adjustments to credits are separately determined and netted as appropriate. Adjustments to credits are not multiplied by the tax rate, but rather, adjustments to items of credit are taken into account as an increase or decrease in determining the amount of the imputed underpayment.

III. Alternative Procedure for Seeking Modifications to Imputed Underpayments

CAA clarifies the procedures under Code Sec. 6225(c)(2) that permit a partnership to seek modification of an imputed underpayment. These procedures allow reviewed-year partners to take adjustments into account so that the partnership's imputed underpayment can be determined by the IRS without regard to that portion of the adjustments. Like other modification procedures in Code Sec. 6225(c), these procedures take place within the period ending 270 days after the date the notice of proposed partnership adjustment is mailed, unless the period is extended with the consent of the IRS, as provided in Code Sec. 6225(c)(7).

Amended Returns of Partners

CAA clarifies the requirements for reviewed-year partners filing amended returns with payment of any tax due. First, the amended return procedure requires the partner to file returns for the taxable year of the partner that includes the end of the partnership's reviewed year, as well as for any tax year with respect to which any tax attribute of the partner is affected by reason of any adjustment to a reviewed-year partnership-related item. Second, the amended returns are required to take into account all such adjustments that are properly allocable to the partner, as well as the effect of the adjustments on any tax attributes. Third, payment of any tax due is required to be included with the amended returns. As is the case for other amended returns, the IRS may require the payment of interest, penalties, and additions to tax (for example, by billing the partner as under present practice).

If the requirements are satisfied, then the partnership's imputed underpayment amount is determined without regard to the portion of the adjustments taken into account by such partners. The amended return modification procedure does not require the participation of all reviewed year partners of the partnership. Direct and indirect reviewed-year partners may participate. The amended return procedure is not intended to cover adjustments to items on an amended return of a partner that do not correspond to adjustments to a reviewed-year partnership-related item and the effect of the adjustments on tax attributes.

Pull-In Procedure - Alternative Procedure to Filing Amended Returns

CAA sets forth an alternative procedure to filing amended returns. The alternative procedure is referred to as the pull-in procedure. Under the pull-in procedure, the IRS determines the partnership's imputed underpayment as reduced by the portion of the adjustments to partnership-related items that direct and indirect reviewed-year partners take into account and with respect to which those partners pay the tax due, provided the requirements of the pull-in procedure are met.

Under pull-in, reviewed-year partners pay the tax that would be due with amended returns, make binding changes to their tax attributes for subsequent years, and provide the IRS with the information necessary to substantiate that the tax was correctly computed and paid. However, the partners file no amended returns. Thus, there are generally no corollary effects on the partners' returns beyond the effects on tax attributes, in other taxable years, of the adjustments to partnership-related items.

Pull-in, as well as the amended return modification procedure, is available generally to direct and indirect reviewed-year partners, in the case of tiered partnerships. The pull-in procedure generally does not require the participation of all direct and indirect reviewed-year partners of the partnership.

Pull-in requires the participating partner to pay the tax that would be due under the amended return filing procedure. The partner is responsible for remitting the payment unless the IRS provides that another person, such as the partnership or a third party, may remit the payment on the partner's behalf. Payment is due within the period ending 270 days after the date the notice of proposed partnership adjustment is mailed (unless the period is extended with the IRS's consent).

Pull-in requires that the partner agree to take into account, in the form and manner required by the IRS, the adjustments and the effects on the partner's tax attributes of the adjustments to partnership-related items properly allocable to the partner.

Pull-in requires that the partner provide, in the form and manner specified by the IRS, such information as the IRS may require to carry out the pull-in procedure. This requirement can include information in the same form as on an amended return, if the IRS so specifies. The information is to be provided within the period ending 270 days after the date the notice of proposed partnership adjustment is mailed (unless the period is extended with the IRS's consent).

If all of the requirements are satisfied, the imputed underpayment can be modified. In the event that a partner provides the required information, but does not make the required payment, for example, the imputed underpayment of the partnership is not modified with respect to those adjustments.

Rules Applicable Both to the Amended Returns of Partners and to the Pull-in Procedure

If an adjustment involves reallocation of an item from one partner to another, the opportunity to modify the imputed underpayment under amended return procedure (Code Sec. 6225(c)(2)(A)) or pull-in procedures (Code Sec. 6225(c)(2)(B)) is available only if the requirements of one or the other of the amended return or pull-in procedures are satisfied with respect to all partners affected by the adjustment involving reallocation.

For purposes of the amended return and pull-in procedures, tax relating to adjustments to a reviewed-year partnership-related item and the effect of the adjustments on tax attributes may be determined and assessed without regard to the otherwise applicable statute of limitations of Code Sec. 6501 and Code Sec. 6511. For example, if a notice of proposed partnership adjustment is mailed to a partnership by the IRS more than three years after a partner filed his or her return for the year including the end of the reviewed year, the three-year statute of limitations under Code Sec. 6501 or Code Sec. 6511 does not preclude the filing of an amended return, the assessment and payment of the partner's tax due for that year, or the proper crediting or refund of an amount paid by a partner, but these results apply only with respect to adjustments to partnership-related items for the reviewed year (and the effect of such adjustments on any tax attributes).

In the case of adjustments taken into account on an amended return of a partner or in a pull-in with respect to a partner, the effects of these adjustments on tax attributes are binding. This binding effect applies for the tax year of the partner that includes the end of the reviewed year of the partnership and any taxable year for which a tax attribute is affected by such an adjustment. Any failure to take into account the effects of adjustments on tax attributes is treated for all Federal tax purposes in the same manner as a failure by a partner to treat a partnership-related item consistently with the treatment of the item on the partnership return (as provided in Code Sec. 6222). For example, if a partner who files an amended return or provides information in a pull-in fails to take into account in other taxable years the effect on tax attributes of adjustments to partnership-related items that are properly allocable to the partner, any underpayment attributable to the failure may be assessed under math error procedures as provided in Code Sec. 6222(b).

The provision clarifies the rules applicable in the case of partnerships and S corporations in tiered structures when a partner files an amended return and pays, or provides information to the IRS and pays in a pull-in. Specifically, in the case of any partnership, any partner of which is a partnership, the amended return and pull-in rules of Code Sec. 6225(c)(2)((A) and (B) apply with respect to any partner (the "relevant partner") in the chain of ownership of such partnerships, provided that certain requirements are met. As a practical matter, this rule generally permits the filing of amended returns even if some, but not all, of the partners (or S corporation shareholders treated as partners for this purpose) file amended returns. Similarly, this rule generally permits some but not all partners to participate in a pull-in, provided requirements are met.

Requirements applicable to both the amended return procedure and the pull-in procedure include the requirement that such information as the IRS may require be furnished to the IRS for purposes of administering the amended return or pull-in rules in the case of tiered structures. In this context, the IRS may require information with respect to any chain of ownership of the relevant partner. The IRS may require that each partnership in the chain of ownership between the relevant partner and the audited partnership must satisfy the requirements for filing amended returns or for participating in the pull-in, so that all partnerships in the chain of ownership between the relevant partner and the audited partnership either meets the requirement of filing an amended return, or meets the requirements for supplying information in a pull-in.

Example: An audited partnership has three partners, A, B, and C, each of which is a partnership. Partnership B in turn has two partners, D and E, each of which is a partnership. Partnerships A, C, D, and E each have only 5 partners. Individual Q is a partner in partnership E, and agrees to participate in a pull-in, pay the tax due, and provide information as required by the IRS (including information similar to that which would be supplied on an amended return of Q, and information with respect to the chain of ownership between Q as the relevant partner and the audited partnership). The provision does not contemplate that the IRS may require Q to supply information about the chain of ownership between the audited partnership and upper-tier partners of partnerships A, C, or D. However, partners of A, C, or D that file amended returns or participate in the pull-in may be required to supply information on the chain of ownership between themselves and the audited partnership, as well as information on their own chains of ownership should they be partnerships or S corporations.

Other Modification Procedures: References to Adjustments

CAA clarifies the operation of modification procedures under Code Sec. 6225(c)(3) (relating to tax-exempt partners), Code Sec. 6225(c)(4) (relating to applicable highest tax rates), and Code Sec. 6225(c)(5) (relating to certain passive losses of publicly traded partnerships). In each of these modification procedures, the provision clarifies that the determination of the imputed underpayment is made without regard to the adjustment or portion of the adjustment being described (not without regard to a portion of the imputed underpayment).

Other Modification Procedures: Adjustment Not Resulting in an Imputed Underpayment

CAA states specifically that the modification procedures are available if adjustments to partnership-related items do not result in an imputed underpayment. Under Code Sec. 6225(c)(9), information relating to a modification may be offered by the partnership in the case of adjustments that do not result in an imputed underpayment, and such adjustments may be modified by the IRS as the IRS determines appropriate.

IV. Other Changes to Partnership Audit Rules

Push-Out Treatment of Passthrough Partners in Tiered Structures

CAA addresses the situation of a partnership (or an S corporation, which is treated similarly to a partnership under this rule) that is a direct or indirect partner of an audited partnership which has elected to push out adjustments of partnership-related items to partners (or S corporation shareholders, which are treated similarly to partners under this rule) under Code Sec. 6226. The provision sets forth requirements applicable to such partners and the time frame for satisfying these requirements.

If a partner that receives a statement in a push-out is a partnership, that partner must satisfy two requirements. First, the partner must file with the IRS a partnership adjustment tracking report that includes information required by the IRS. For example, the required information may include identifying the partner's own partners or shareholders, describing and quantifying adjustments necessary to determine partnership-related items or the equivalent in the hands of those partners or shareholders, or other information necessary or appropriate to assessment and collection from tiers of partners in a push-out.

Second, that partner is required to furnish statements to its partners under rules similar to Code Sec. 6226(a)(2), or, if no such statements are furnished, to compute and pay its imputed underpayment under rules similar to Code Sec. 6225 (other than certain modification-related rules). That is, the partnership must push out the adjustments to its partners, or if not, it must compute and pay its imputed underpayment. If such a partnership computes and pays its imputed underpayment, the rules of Code Sec. 6225 apply (other than the modifications provided in Code Sec. 6225(c)(2) (amended returns and pull-in), 6225(c)(7) (270-day period for modifications), and Code Sec. 6225(c)(9) (modification of adjustment not resulting in imputed underpayment). The imputed underpayment of the partnership is determined by appropriately netting all partnership adjustments on the statement (taking into account limitations to which adjustments that decrease the imputed underpayment could be subject) and applying the highest rate of tax in effect for the reviewed year under section 1 or 11, as provided in Code Sec. 6225. The partnership pays its imputed underpayment as so determined.

The due date for the payment of the imputed underpayment or furnishing of partner statements and the filing of the partnership adjustment tracking report is the return due date (including allowable extensions) for the adjustment year of the audited partnership. That is, the partnership adjustment tracking report must be filed with the IRS, and the imputed underpayment paid or statements furnished to partners or S corporation shareholders (or if not so furnished, an imputed underpayment must be paid), not later than the due date for the adjustment year of the audited partnership. In the case of a partner that is not a partnership or an S corporation and that receives a statement in a push-out, the partner's tax is increased for the partner's taxable year that includes the date of the statement, as provided in Code Sec. 6226(b). In the case of partner that is a trust and that receives a statement in a push-out, regulatory authority to provide any necessary rules is set forth.

CAA defines an audited partnership for purposes of the push-out treatment of passthrough partners in tiered structures under Code Sec. 6226(b)(4). With respect to a partner that is a partnership or an S corporation and that receives a statement in a push-out, the audited partnership is the partnership in the chain of ownership originally electing the application of Code Sec. 6226.

Failure of Partnership or S Corporation to Pay Imputed Underpayment

Under CAA, if, following an assessment, a partnership fails to pay an imputed underpayment within 10 days after the date of notice and demand by the IRS, the applicable interest rate increases, and assessment and collection against adjustment-year partners for their proportionate shares may be made. The interest rate under the provision is the underpayment rate as modified, that is, the rate is the sum of the federal short-term rate (determined monthly) plus 5 percentage points. An S corporation and its shareholders are treated like a partnership and its partners under this provision.

The provision applies if, within 10 days of notice and demand for payment, a partnership fails to pay an imputed underpayment under Code Sec. 6225 or any interest or penalties under Code Sec. 6233. For example, the increased interest rate applies and assessment and collection from adjustment year partners may be made in the case of a partnership that has not elected under Code Sec. 6226 to push out adjustments to partners nevertheless fails to pay within 10 days of notice and demand.

The provision also applies if any specified similar amount (or interest or penalties with respect to the amount) have not been paid. A specified similar amount arises if a partner that is an upper-tier partnership or S corporation in a push-out fails to pay an imputed underpayment under Code Sec. 6226(b)(4)(A)(ii) (including any failure to furnish statements that is treated as a failure to pay an imputed underpayment under Code Sec. 6651(i)). A specified similar amount also includes an amount required to be paid by former partners (including partners that are themselves partnerships) of a partnership that has ceased to exist or terminated (not including a technical termination) as well as interest or penalties with respect to the amount.

The date of the notice and demand for payment initiates a two-year period in which the IRS may assess against the adjustment-year partners (or former partners). The two-year period of limitations also applies to a proceeding begun in court without assessment with respect to a partner. The period may be extended by agreement.

CAA expands the present-law Code Sec. 6501(c)(4) rule permitting extension by agreement between the IRS and the taxpayer of the time period for assessment. As a result, that rule permitting extension by agreement is not limited to assessment periods prescribed in Code Sec. 6501, but rather, applies more broadly to assessment periods and in particular applies to the period for assessment against partners in the case of failure of a partnership to pay an imputed underpayment after notice and demand under Code Sec. 6232(f).

If a partnership has ceased to exist or terminated (not including a technical termination) within the meaning of Code Sec. 6241(7), the provision applies with respect to the former partners of the partnership. For example, the former partners of the partnership may be the partners for the most recent period before the partnership ceased to exist or terminated, such as the partners for purposes of the last return filed by the partnership.

A partner is liable for no more than the partner's proportionate share of the imputed underpayment, interest, and penalties, measured as the IRS determines on the basis of the partner's distributive share of items. For example, the distributive shares set forth in the partnership agreement, or as determined for purposes of Schedule K-1, may serve as a measure of a partner's proportionate share. The IRS is required to determine partners' proportionate shares so that the aggregate proportionate shares so determined total 100 percent. Thus, no partner is required to pay more than the partner's proportionate share of the imputed underpayment, interest, and penalties.

Partner payments under this provision reduce the partnership's liability to pay. The partnership's liability is not reduced by partner payments if such payments are made after the date on which the partnership pays, however.

Example: If Partnership ABC's liability is $100, and partner payments aggregating $60 before July 15 reduce ABC's liability to $40, and ABC pays $40 on July 15, a partner payment of $40 on August 1 does not reduce ABC's liability. ABC may not receive a credit or refund for any part of the partner payment of $40; the partner, however, may.

The IRS may assess the tax, interest, and penalties on the proportionate share of each partner (as of the close of the adjustment year) of the partnership without regard to the deficiency procedures generally applicable to income tax. Under the provision, assessment may not be made (or proceeding in court begun without assessment) after the date that is two years after the date on which the IRS provides notice and demand.

Amendment of Statements (Schedule K-1s) to Partners

CAA clarifies that a partnership that has validly elected out of the partnership audit rules under Code Sec. 6221(b), and therefore is not subject to the partnership audit rules, may amend partner statements (Schedule K-1s) after the due date of the partnership return to which the statements relate.

Treatment of Partnership Adjustments that Result in a Decrease in Tax in Push-Out

As an alternative to a partnership payment of the imputed underpayment in the adjustment year, the audited partnership may elect to furnish to the IRS and to each partner of the partnership for the reviewed year a statement of the partner's share of any adjustments to partnership-related items as determined by reference to the final determination with respect to the adjustment. In this situation, Code Sec. 6225, requiring the audited partnership to pay the imputed underpayment, does not apply. Instead, each reviewed-year partner takes the adjustments into account for the taxable year that includes the date of the statement and pays the tax as provided in Code Sec. 6226 (taking into account Code Sec. 6226(b)(4)).

The provision provides that in taking into account adjustments to determine a partner's tax in a push-out, decreases as well as increases in the partner's tax are taken into account. The provision clarifies that in a push-out, the partner's tax for the taxable year that includes the date of the statement is adjusted by the aggregate of the correction amounts (not adjustment amounts).

The correction amount for a particular taxable year of a partner takes into account both decreases and increases. That is, the correction amount for the partner's taxable year that includes the end of the reviewed year is the amount by which the income tax would increase or decrease if the partner's share of adjustments were taken into account for that year. Similarly, the correction amount for any taxable year of the partner after that year, and before the year that includes the date of the statement, is the amount by which the income tax would increase or decrease if the partner's share of adjustments were taken into account for that year. The present-law treatment of mathematical or clerical errors applies with respect to correction amounts and aggregate correction amounts.

Clarification of Assessment of Imputed Underpayments

CAA clarifies that the assessment of any imputed underpayment is not subject to the deficiency procedures. Rather, they are assessed and collected in accordance with the rules of Code Sec. 6221 through Code Sec. 6235. Any imputed underpayment (including an imputed underpayment under Code Sec. 6226(b)(4)(A)(ii) of a partnership or S corporation that is a direct or indirect partner of an audited partnership in a push-out) is assessable under the provision.

The provision clarifies that in the case of an administrative adjustment request to which Code Sec. 6227(b)(1) applies, the underpayment must be paid, and may be assessed, when the request is filed.

A reference in Code Sec. 6232(b) to the assessment of a deficiency is corrected to refer to the assessment of an imputed underpayment. Generally, then, an imputed underpayment of a partnership may not be assessed or collected before the close of the 90th day after the day on which a notice of final partnership adjustment was mailed, and if a petition is filed under Code Sec. 6234 with respect to the notice, the decision of the court has become final.

However, the restrictions on assessment and collection of an imputed underpayment provided generally under Code Sec. 6232(b) do not apply in the case of any specified similar amount within the meaning of Code Sec. 6232(f)(2). As a result, the restrictions do not apply to the imputed underpayment of partner that is a partnership or S corporation in a push-out. A specified similar amount means the amount described in Code Sec. 6226(b)(4)(A)(ii)(II), including an failure to furnish statements to partners or S corporation shareholders that is treated as a failure to pay that amount under Code Sec. 6651(i). A specified similar amount also means any amount assessed on a partner that is a partnership or S corporation. Thus, for example, these restrictions do not apply to assessment and collection of an imputed underpayment of a partnership or S corporation that receives a statement in a push-out and neither timely furnishes statements to its partners or shareholders nor pays its imputed underpayment.

Time Limit for Notice of Proposed Partnership Adjustment

CAA clarifies that a notice of proposed partnership adjustment must be mailed within the applicable period of limitations on making adjustments under the partnership audit rules. The notice of proposed partnership adjustment cannot be relied upon to revive an otherwise expired limitations period under Code Sec. 6235. For purposes of determining whether or not a notice of proposed partnership adjustment is timely, the applicable limitations period is determined under Code Sec. 6235, determined without regard to Code Sec. 6235(a)(2) (relating to the period for modification of an imputed underpayment under Code Sec. 6225(c)(7)), and without regard to Code Sec. 6235(a)(3) (relating to the 330-day period (or the period as extended) for making an adjustment after the date of a notice of proposed partnership adjustment).

CAA does not alter the Code Sec. 6231(b)(2) prohibition against mailing any notice of final partnership adjustment earlier than 270 days after the date on which the notice of proposed partnership adjustment is mailed (except to the extent the partnership elects to waive the prohibition).

Statute of Limitations on Making Adjustments

CAA clarifies several rules relating to the period of limitations on making adjustments. CAA makes clear that the period of limitations on making adjustments under subchapter C of chapter 63 does not limit the period for notification of the IRS and redetermination of tax under Code Sec. 905(c). CAA corrects a cross reference so that it refers to the partnership audit regime rules (rather than to a nonexistent subpart). CAA clarifies a reference to the penalty for substantial omission of income to incorporate a reference to constructive dividends, not just to other omitted items. CAA also clarifies that the time for making any adjustment under the partnership audit regime rules with respect to any tax return, event, or period does not expire before the date determined under Code Sec. 6501(c)(8) (relating to the failure to notify the IRS of certain foreign transfers), that is, generally, the date that is three years after the date on which the IRS is furnished the information required to be reported. CAA clarifies that the time for making any adjustment under the partnership audit regime rules with respect to a listed transaction described in Code Sec. 6501(c)(10) does not expire the date determined under Code Sec. 6501(c)(10), that is, generally, the date that is one year after the earlier of the date on which the IRS is furnished the information required to be reported or the date on which a material advisor meets certain applicable requirements. The provision is clarified by striking Code Sec. 6235(d), a provision included in prior law that has no effect under the partnership audit regime rules.

U.S. Shareholders and Certain Other Persons Treated as Partners

CAA clarifies the treatment under the partnership audit regime rules of U.S. shareholders and certain other persons treated as partners. Generally, in the case of a controlled foreign corporation that is a partner of a partnership, each U.S. shareholder is treated under the partnership audit regime rules as a partner in the partnership. For this purpose, except as otherwise provided by the IRS, the distributive share with respect to the partnership equals the U.S. shareholder's pro rata share with respect to the controlled foreign corporation, determined under rules similar to the rules for determining its pro rata share of subpart F income under Code Sec. 951(a)(2). CAA also addresses the treatment under the partnership audit regime rules of a passive foreign investment company (PFIC) that is a partner in a partnership and that is a qualified electing fund with respect to a taxpayer pursuant to the taxpayer's election under Code Sec. 1295.

Penalties Relating to Administrative Adjustment Requests and Partnership Adjustment Tracking Reports

CAA clarifies existing penalty provisions to ensure that they address compliance with the partnership audit rules. A partnership adjustment tracking report required to be filed pursuant to a Code Sec. 6226 election is treated as a return for purposes of penalties relating to failure to file a partnership return, frivolous position submissions, and preparation of tax returns for other persons. A failure to comply with Code Sec. 6226(b)(4)(A)(ii)(II), relating to the requirement to furnish statements in a push-out, is treated as a failure to pay an imputed underpayment for purposes of the penalty relating to failure to file a tax return or to pay tax. An administrative adjustment request under Code Sec. 6227 is treated as a return for purposes of penalties relating to frivolous position submissions and the preparation of tax returns for other persons. However, CAA clarifies that neither an administrative adjustment request under Code Sec. 6627 nor a partnership adjustment tracking report under Code Sec. 6226(b)(4)(A) is treated as a return for purposes of the partner amended return modification procedure of Code Sec. 6225(c)(2)(A).

Statements to Partners (Adjusted Schedules K-1) Treated as Payee Statements

The provision clarifies that for purposes of the penalty for failure to furnish correct payee statements and the penalty for failure to file correct information returns, statements required to be furnished to partners in a push-out under Code Sec. 6226(a)(2), or statements required to be furnished to partners under rules similar to Code Sec. 6226(a)(2), are treated as payee statements. Statements required to be furnished to partners under rules similar to Code Sec. 6226(a)(2) include statements furnished to partners pursuant to an administrative adjustment request under Code Sec. 6227.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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