Office of Chief Counsel: Relief for Failing to Timely File a Partnership Return Has Not Become Obsolete

(Parker Tax Publishing January 2020)

The Office of Chief Counsel advised that the relief granted to small partnerships by Rev. Proc. 84-35, relating to the penalty under Code Sec. 6698(a) for failure to file a partnership return, did not become obsolete as a result of the repeal of Code Sec. 6231(a)(1)(B) in the Bipartisan Budget Act of 2015. Moreover, the Chief Counsel's Office observed, the legislative history of Code Sec. 6698, which is the basis for the relief provided in Rev. Proc. 84-35, is still relevant, and the scope of the Code Sec. 6698 penalty for failure to file a partnership return has not been affected by the repeal of the TEFRA provisions. Thus, Rev. Proc. 84-35 is not obsolete and continues to apply. PMTA 2020-1.

Background

A partnership that fails to timely file a partnership return as required by Code Sec. 6031(a) is subject to a penalty under Code Sec. 6698, unless the failure to comply with Code Sec. 6031(a) is due to reasonable cause. Congress enacted Code Sec. 6698 and, in the legislative history, Congress indicated that it intended for the reasonable cause exception to the Code Sec. 6698 penalty to apply automatically to small partnerships that meet certain criteria. In Rev. Proc. 81-11, the IRS set forth procedures, consistent with the legislative history, under which partnerships with 10 or fewer partners would not be subject to the Code Sec. 6698 penalty for failure to file a partnership return.

Shortly after the issuance of Rev. Proc. 81-11, Congress enacted a definition of "small partnership" as part of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. Code Sec. 6231(a)(1)(B), as enacted in TEFRA, provided an exception to the term "partnership," for purposes of Code Sec. 6221 through Code Sec. 6232, for a partnership that had 10 or fewer partners, each of whom is a natural person (other than a nonresident alien) or an estate, and where the share of each partnership item is the same as such partner's share of every other item. A husband and wife, and their estates, were treated as one partner in determining whether the partnership had 10 or fewer partners for purposes of Code Sec. 6231(a)(1)(B). TEFRA did not amend Code Sec. 6698 or redefine the scope of the penalty for failure to file a partnership return.

To conform the relief provided in Rev. Proc. 81-11 to the definition of "small partnership" newly provided by Code Sec. 6231(a)(1)(B), the IRS issued Rev. Proc. 84-35 to modify and supersede Rev. Proc. 81-11. Rev. Proc. 84-35 cited the definition of small partnership provided by Code Sec. 6231(a)(1)(B). In order to qualify for the relief provided in Rev. Proc. 84-35, the partnership must come within the exceptions outlined in Code Sec. 6231(a)(1)(B). In citing Code Sec. 6231(a)(1)(B), Rev. Proc. 84-35 was referencing law that existed at the time the revenue procedure was issued. The IRS did not express an intent that later amendments to TEFRA audit procedures would affect application of the exception to the partnership failure to file penalty.

Effect of Repeal of Code Section 6231(a)(1)(B) on Rev. Proc. 84-35

Code Sec. 6231(a)(1)(B) was repealed by the Bipartisan Budget Act of 2015 (BBA). The BBA rules, including the repeal of Code Sec. 6231(a)(1)(B), are generally applicable to partnerships with tax years beginning after December 31, 2017. The BBA provisions automatically apply to a partnership unless the partnership files a partnership return electing out of the BBA regime. Thus, the BBA rules are applicable to such partnerships for which the relief provided in Rev. Proc. 84-35 would be relevant.

Given the repeal of Code Sec. 6231(a)(1)(B), a question was raised on how to interpret Rev. Proc. 84-35 since Code Sec. 6231(a)(1)(B) is now inapplicable to any partnership for which the relief provided in Rev. Proc. 84-35 is relevant.

According to the Office of Chief Counsel, the reference in Rev. Proc. 84-35 to Code Sec. 6231(a)(1)(B) is a reference to Code Sec. 6231(a)(1)(B) as it was in effect when Rev. Proc. 84-35 was originally issued. Thus, the Chief Counsel's Office said, it is irrelevant that there does not exist any current Code Sec. 6231(a)(1)(B) that is generally effective and applicable to partnerships seeking relief under Rev. Proc. 84-35. Moreover, the Chief Counsel's Office observed, the legislative history of Code Sec. 6698, which is the basis for the relief provided in Rev. Proc. 84-35, is still relevant, and the scope of the Code Sec. 6698 penalty for failure to file a partnership return has not been affected by the repeal of the TEFRA provisions. Thus, Rev. Proc. 84-35 is not obsolete and continues to apply.

Observation: Rev. Proc. 84-35 provides that in order to qualify for the relief provided in the revenue procedure, the partnership, or any of the partners, must establish, if so requested by the IRS, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns. Additionally, the revenue procedure states that all the relevant facts and circumstances will be taken into account in determining whether a partner has fully reported the partner's share of the income, deductions, and credits of the partnership. Accordingly, the IRS may develop procedures in accordance with Rev. Proc. 84-35 to ensure that any partnership claiming relief is in fact entitled to such relief.

For a discussion of Rev. Proc. 84-25 and the penalty for failing to file a partnership return, see Parker Tax ¶28,550.

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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