AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulation.

SUMMARY:

This document contains final regulations implementing the centralized partnership audit regime. These final regulations affect partnerships for taxable years beginning after December 31, 2017 and ending after August 12, 2018, as well as partnerships that make the election to apply the centralized partnership audit regime to partnership taxable years beginning on or after November 2, 2015, and before January 1, 2018.

DATES:

 

Effective date: These regulations are effective on February 27, 2019.

Applicability Date: For dates of applicability, see §§ 301.6221(a)-1(c); 301.6222-1(e); 301.6225-1(i); 301.6225-2(g); 301.6225-3(e); 301.6226-1(g); 301.6226-2(h); 301.6226-3(i); 301.6227-1(h); 301.6227-2(e); 301.6227-3(d); 301.6231-1(h); 301.6232-1(f); 301.6233(a)-1(d); 301.6233(b)-1(e); 301.6234-1(f); 301.6235-1(f); 301.6241-1(b); 301.6241-2(b); 301.6241-3(g); 301.6241-4(b); 301.6241-5(d); 301.6241-6(c).

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations under sections 6221, 6226, 6235, and 6241, Jennifer M. Black of the Office of Associate Chief Counsel (Procedure and Administration), (202) 317-6834; concerning the regulations under sections 6225, 6231, and 6234, Joy E. Gerdy-Zogby of the Office of Associate Chief Counsel (Procedure and Administration), (202) 317-6834; concerning the regulations under sections 6222, 6227, 6232, and 6233, Steven L. Karon of the Office of Associate Chief Counsel (Procedure and Administration), (202) 217-6834; concerning the regulations under section 6225 relating to creditable foreign tax expenditures, Larry R. Pounders, Jr. of the Office of Associate Chief Counsel (International), (202) 317-5465; concerning the regulations relating to chapters 3 and 4 of the Internal Revenue Code (other than section 1446), Subin Seth of the Office of Associate Chief Counsel (International), (202) 317-5003; and concerning the regulations relating to section 1446, Ronald M. Gootzeit of the Office of Associate Chief Counsel (International), (202) 317-4953 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains final regulations under sections 6221 through 6241 of the Internal Revenue Code (Code) to amend the Procedure and Administration Regulations (26 CFR part 301) to implement the centralized partnership audit regime enacted by section 1101 of the Bipartisan Budget Act of 2015, Public Law 114-74 (BBA), as amended by the Protecting Americans from Tax Hikes Act of 2015, Public Law 114-113, div Q (PATH Act), and sections 201 through 207 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).

Section 1101(a) of the BBA removed former subchapter C of chapter 63 of the Code effective for partnership taxable years beginning after December 31, 2017. Former subchapter C of chapter 63 of the Code 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 also removed subchapter D of chapter 63 of the Code and part IV of subchapter K of chapter 1 of the Code, 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 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.

On June 14, 2017, the Department of the Treasury (Treasury Department) and the IRS published in the Federal Register (82 FR 27334) a notice of proposed rulemaking (REG-136118-15) (June 2017 NPRM) proposing rules under section 6221 regarding the scope and election out of the centralized partnership audit regime, section 6222 regarding consistent treatment by partners, section 6223 regarding the partnership representative, section 6225 regarding partnership adjustments made by the IRS and determination of the amount of the partnership's liability (referred to as the imputed underpayment), section 6226 regarding the alternative to payment of the imputed underpayment by the partnership, section 6227 regarding administrative adjustment requests (AARs), and section 6241 regarding definitions and special rules. The Treasury Department and the IRS received written public comments in response to the regulations proposed in the June 2017 NPRM, and a public hearing regarding the proposed regulations was held on September 18, 2017.

On November 30, 2017, the Treasury Department and the IRS published in the Federal Register (82 FR 56765) a notice of proposed rulemaking (REG-119337-17) (November 2017 NPRM) proposing rules regarding international provisions under the centralized partnership audit regime, including rules relating to the withholding of tax on foreign persons, the withholding of tax to enforce reporting on certain foreign accounts, and the treatment of creditable foreign tax expenditures of a partnership. No written comments were submitted in response to this NPRM, and no hearing was requested or held.

On December 19, 2017, the Treasury Department and the IRS published in the Federal Register (82 FR 60144) a notice of proposed rulemaking (REG-120232-17 and REG-120233-17) (December 2017 NPRM) proposing administrative and procedural rules under the centralized partnership audit regime, including rules addressing assessment and collection, penalties and interest, periods of limitations on making partnership adjustments, and judicial review of partnership adjustments. The regulations proposed in the December 2017 NPRM also provided rules addressing how pass-through partners take into account adjustments under the alternative to payment of the imputed underpayment described in section 6226 and under rules similar to section 6226 when a partnership files an AAR under section 6227. Written comments were received in response to the December 2017 NPRM. However, no hearing was requested or held.

On January 2, 2018, the Treasury Department and the IRS published in the Federal Register (82 FR 28398) final regulations under section 6221(b) providing rules for electing out of the centralized partnership audit regime.

On February 2, 2018, the Treasury Department and the IRS published in the Federal Register (83 FR 4868) a notice of proposed rulemaking (REG-118067-17) (February 2018 NPRM) proposing rules for adjusting tax attributes under the centralized partnership audit regime. Written comments were received in response to the February 2018 NPRM. However, no hearing was requested or held.

On March 23, 2018, Congress enacted the TTCA, which made a number of technical corrections to the rules under the centralized partnership audit regime. The amendments under 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 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 § 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. Corresponding temporary regulations under § 301.9100-22T were also withdrawn.

On August 17, 2018, the Treasury Department and the IRS published in the Federal Register (83 FR 41954) a notice of proposed rulemaking, notice of public hearing, and withdrawal and partial withdrawal of notices of proposed rulemaking (REG-136118-15) (August 2018 NPRM) that withdrew the regulations proposed in the June 2017 NPRM, the November 2017 NPRM, the December 2017 NPRM, and the February 2018 NPRM, and proposed regulations reflecting the technical corrections enacted in the TTCA as well as other changes as discussed in the preamble to the August 2018 NPRM. Written public comments were received in response to the August 2018 NPRM, and a public hearing regarding the proposed regulations was held on October 9, 2018.

In the preambles to the June 2017 NPRM and November 2017 NPRM, comments were requested regarding certain international and tax-exempt aspects of the centralized partnership audit regime. No comments were received in response to these requests, other than a comment regarding fiduciary issues under title I of the Employee Retirement Income Security Act of 1974 (ERISA), which is discussed later in section 3.B.i of the Summary of Comments and Explanation of Revisions. The Treasury Department and IRS will still consider comments on whether any issues related to international rules and tax-exempt partners warrant guidance either under the centralized partnership audit regime provisions or under the relevant provisions of the Code directly related to those areas.

After careful consideration of all written public comments received in response to the June 2017 NPRM, the December 2017 NPRM, and the August 2018 NPRM, as well as statements made during the public hearings for the June 2017 NPRM and the August 2018 NPRM, the portions of the August 2018 NPRM described in this preamble are adopted as amended by this Treasury Decision. Comments received in response to the February 2018 NPRM or that otherwise concern basis and tax attribute rules under § 301.6225-4 or § 301.6226-4 will be addressed in future guidance. For purposes of this preamble, the regulations proposed in the June 2017 NPRM, the November 2017 NPRM, and the December 2017 NPRM are collectively referred to as the “former proposed regulations.” The regulations proposed in the August 2018 NPRM are referred to as the “proposed regulations.”

Summary of Comments and Explanation of Revisions

Thirty written comments were received in response to the June 2017 NPRM. Five statements were provided at the public hearing held on September 18, 2017. Four written comments were received in response to the December 2017 NPRM. No public hearing was held. Eight written comments were received in response to the August 2018 NPRM, and one statement was provided at the public hearing held on October 9, 2018. 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 www.regulations.gov or upon request.

In addition to changes in response to the comments, editorial revisions were also made to correct typographical errors, grammatical mistakes, and erroneous cross-references. 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. All applicability dates were revised to provide that the final regulations will not apply to taxable years that ended before the date the August 2018 NPRM was filed with the Federal Register. To the extent comments recommended as a general matter that the regulations take into account the TTCA amendments, those comments were adopted as described in this Summary of Comments and Explanation of Revisions.

1. Scope of the Centralized Partnership Audit Regime

Three comments were received regarding the scope of the centralized partnership audit regime. All of the comments concerned former proposed § 301.6221(a)-1, which was issued before the TTCA was enacted. No comments were received on proposed § 301.6221(a)-1 as revised subsequent to the TTCA in the August 2018 NPRM.

Prior to amendment by the TTCA, section 6221(a) provided that any adjustment to items of income, gain, loss, deduction, or credit of a partnership shall be determined at the partnership level. Former proposed § 301.6221(a)-1(b)(1)(i) had defined the phrase “items of income, gain, loss, deduction, or credit” to mean all items and information required to be shown, or reflected, on a return of the partnership and any information contained in the partnership's books and records for the taxable year. One comment stated the definition under former proposed § 301.6221(a)-1(b)(1)(i) included items on the partnership return or in the partnership's books and records regardless of whether (i) such items or information would affect the income that the partnership reports or (ii) the particular tax characteristics of the separate partners would affect the ultimate tax liability. The comment expressed concern that, by broadly defining the scope of the centralized partnership audit regime, the proposed regulations would expand the number of partnerships and partners that encounter differences between the correct tax they would have paid if they had properly reported, and the amount of the imputed underpayment. No changes to the regulations were made in response to this comment.

The TTCA amended section 6221(a) by replacing the phrase “items of income, gain, deduction, loss or credit of a partnership for a partnership taxable year (and any partner's distributive share thereof)” with the term “partnership-related item.” The TTCA added a definition of “partnership-related item” to section 6241(2). The August 2018 NPRM adopted the TTCA amendments to section 6221(a) and 6241 by moving the majority of the regulation text under former proposed § 301.6221(a)-1 to the definition of “partnership-related item” under proposed § 301.6241-6. Because of these changes, the comment is generally no longer applicable to this section of the regulations.

In addition, the TTCA amendments address the comment's first concern that the scope of former proposed § 301.6221(a)-1(b)(1)(i) was overly broad in that it was delineated without regard to whether items or information adjusted at the partnership level affect the income of the partnership. Section 6241(2)(B) broadly defines a partnership-related item as any item or amount with respect to the partnership which is relevant in determining the tax liability of any person under chapter 1 of the Code and any partner's distributive share thereof. Section 6241(2)(B). Nothing within that definition limits the term partnership-related item to income reported by the partnership. To the contrary, partnership-related items are any items with respect to the partnership that are relevant to determining any person's chapter 1 tax, which could include partnership expenses, credits generated by partnership activity, assets and liabilities of the partnership, and any other items concerning the partnership that are relevant to someone's chapter 1 tax, irrespective of the impact such items have on the partnership's income.

Furthermore, the core feature of the centralized partnership audit regime is to provide a centralized method of examining items of a partnership. Adjusting items on a partnership's return or in the partnership's books and records, regardless of their effect on partnership income, in a centralized partnership proceeding at the partnership level is not only consistent with this centralized approach, but it also results in efficiencies because one proceeding can be conducted that will bind all partners and the partnership. See section 6223(b). Nothing in the statute requires only items that affect the partnership's income, as reported on the partnership's return, to be adjusted at the partnership level.

Regarding the comment's second concern that an imputed underpayment is determined without regard to partners' tax characteristics and that the imputed underpayment amount differs from the amount of tax the partners would have paid had the items been reported correctly, those concerns are addressed in section 3.A. of this Summary of Comments and Explanation of Revisions.

Former proposed § 301.6221(a)-1(b)(1)(i) provided as an example of an “item of income, gain, loss, deduction, or credit” any items related to transactions between a partnership and any person including disguised sales, guaranteed payments, section 704(c) allocations, and transactions to which section 707 applies. Former proposed § 301.6221(a)-1(b)(1)(i)(H). One comment suggested that this provision inappropriately included partner items such as a disguised fee under section 707(a)(2)(A) and the gain or loss a partner may realize from a disguised sale under section 707(a)(2)(B). The comment recommended revising the regulations to refer to “items of a partnership related to . . . transactions to which section 707 applies.” Similarly, another comment expressed concern about situations where a partner was not acting in the partner's capacity as a partner, but rather as a counterparty to a transaction with the partnership. The comment suggested that the regulations clarify that a final determination of a transaction between a partnership and a partner following an examination of the partnership is not binding on any third person, including a partner not acting in its capacity as a partner and who was not a party to the examination.

These comments are addressed by the final regulations under § 301.6241-1(a)(6) regarding the definition of partnership-related item. Proposed § 301.6241-6(b)(4) and (5) defined the phrase “item or amount with respect to the partnership” to include an item or amount that relates to a transaction with the partnership by a partner acting in its capacity as a partner or by an indirect partner acting in its capacity as an indirect partner as well as an item or amount relating to a transaction that is described in section 707(a)(2), 707(b), or 707(c). Accordingly, under the proposed regulations if an item or amount related to a transaction that is described in section 707(a)(2), 707(b), or 707(c) and was relevant in determining chapter 1 tax, that item was a partnership-related item and must be determined at the partnership level.

As described more fully in section 1.B., the final regulations clarify that items or amounts relating to transactions of the partnership are items or amounts with respect to the partnership only if those items or amounts are shown, or required to be shown, on the partnership return or are required to be maintained in the partnership's books and records. The final regulations further clarify that items or amounts shown, or required to be shown, on a return of a person other than the partnership (or in that person's books and records) that result after application of the Code to a partnership-related item and that take into account the facts and circumstances specific to that person are not partnership-related items and, therefore, are not determined at the partnership level under the centralized partnership audit regime.

The changes in the final regulations to the definition of partnership-related item address the concerns raised by the comment. First, § 301.6241-1(a)(6) provides that only items or amounts reflected, or required to be reflected on the partnership's return or in its books and records are with respect to the partnership. If such items are relevant to determining chapter 1 tax such items are partnership-related items. This rule applies equally to items or amounts relating to any transaction with, liability of, or basis in the partnership. Second, § 301.6241-1(a)(6) further provides that items reflected, or required to be reflected on the return of a person other than the partnership or in that person's books and records that result after application of the Code to a partnership-related item are not with respect to a partnership and, thus, not partnership-related items. Accordingly, only items of the partnership, as suggested by the comment, are partnership-related items under § 301.6241-1(a)(6).

Proposed § 301.6221(a)-1(a) provided that any consideration necessary to make a determination at the partnership level under the centralized partnership audit regime, including the period of limitations on making partnership adjustments under section 6235 or facts necessary to calculate an imputed underpayment under section 6225 were determined at the partnership level. The final regulations under § 301.6221(a)-1(b) retain this concept, but with revised language. The final regulations provide that any legal or factual determinations underlying any adjustment or determination made under the centralized partnership audit regime are also determined at the partnership level under the centralized partnership audit regime. For instance, such determinations include the period of limitations on making adjustments under the centralized partnership audit regime and any determinations necessary to calculate the imputed underpayment or any modification of the imputed underpayment under section 6225.

After consideration, the Treasury Department and the IRS have concluded that the phrase “legal and factual determinations underlying an adjustment or determination” instead of the phrase “any consideration necessary to make a determination at the partnership level” more clearly and accurately reflects the rule that facts and legal conclusions that underlie adjustments to partnership-related items, tax, and penalties made at the partnership level are also determined at the partnership level. The revised language more clearly describes the rule and provides taxpayers with more definitive guidance regarding the items determined at the partnership level. Additionally, this language is consistent with language used in proposed § 301.6241-6(b)(8), which was removed as described in section 2 of this Summary of Comments and Explanation of Revisions.

Lastly, the final regulations remove the list of cross-references from the end of proposed § 301.6221(a)-1(a). The TTCA amended section 6221(a) to provide that adjustments to partnership-related items are determined at the partnership level “except to the extent otherwise provided in” subchapter C of chapter 63. Because the statutory language is clear that there are exceptions within subchapter C of chapter 63 to the general rule under section 6221(a) and § 301.6221(a)-1, the list of cross-references from proposed § 301.6221(a)-1(a) was no longer necessary.

A. Penalty Defenses

Five comments were received with respect to former proposed § 301.6221(a)-1(c), which provided that any defense to any penalty, addition to tax, or additional amount must be raised by the partnership in a partnership-level proceeding under the centralized partnership audit regime, regardless of whether the defense relates to facts and circumstances relating to a person other than the partnership. Once the adjustments determined in the partnership-level proceeding became final, no defense to any penalty determined could be raised or taken into account. Former proposed § 301.6221(a)-1(c).

Several comments stated that the rule under former proposed § 301.6221(a)-1(c) was inequitable to partners because, among other reasons, partners had no control over whether the partnership representative would raise a partner-specific defense, especially in the case of indirect partners who are less directly connected to the partnership representative. Some comments recommended the regulations clarify how partner-level defenses would be raised in the partnership-level proceeding and how decisions regarding those penalty defenses would be communicated to partners. Other comments suggested that partners should be able to raise their own partner-level defenses. In response to these comments, former proposed § 301.6221(a)-1(c) was removed from the proposed regulations in the December 2017 NPRM. See section 3 of the preamble to the December 2017 NPRM. The December 2017 NRPM also proposed regulations under sections 6225 and 6226 (former proposed §§ 301.6225-2(d)(2)(viii) and 301.6226-3(i)) which allowed partners to raise their own partner-level defenses at the time partners took into account the partnership adjustments determined at the partnership level (either through the modification process or as part of the election under section 6226). For further discussion of the rules regarding partner-level defenses under sections 6225 and 6226, see sections 3.D. and 4.C.ii.I. of this preamble. See also section 8.A. of this preamble regarding section 6233(a).

B. Partnership-Related Item

Proposed § 301.6241-6(a) defined the term “partnership-related item” as any item or amount with respect to the partnership which is relevant to determining the tax liability of any person under chapter 1 and any partner's distributive share of any such item or amount. Proposed § 301.6241-6(b) provided that an item or amount is with respect to the partnership without regard to whether the item or amount appeared on the partnership return if the item or amount was described in one of eight categories. Two categories described items or amounts that are shown or reflected, or required to be shown or reflected, on a return of the partnership under section 6031 or are in the partnership's books and records. The other categories described items or amounts relating to certain transactions with the partnership, items or amounts relating to liabilities of the partnership provided the item or amount was reported by a partner, and items or amounts relating to basis in the partnership. Imputed underpayments and any legal or factual determinations necessary to make an adjustment to items or amounts described in the other categories were also defined as items or amounts with respect to the partnership. Proposed § 301.6241-6(b)(1) through (8).

After careful consideration, the Treasury Department and the IRS have revised the definition of “item or amount with respect to the partnership.” First, the final regulations remove the language “without regard to whether or not such item or amount appears on the partnership's return” from proposed § 301.6241-6(b). That phrase derived from the parenthetical in section 6241(2)(B)(i) that follows “item or amount with respect to the partnership.” The Treasury Department and the IRS have determined that the parenthetical language describes items or amounts that appear on the partnership return, items or amounts that were required to appear on the return but actually did not, and items or amounts that factor into the determination of items or amounts that do appear on the partnership return. The Treasury Department and the IRS have concluded that this parenthetical does not extend the concept of “with respect to the partnership” to items or amounts that are reported by third parties and that are otherwise not defined as partnership-related items in these final regulations. See § 301.6241-1(a)(6)(vi)(A) and (B).

Second, the final regulations replace the list of eight categories of items or amounts that were with respect to the partnership with a single, streamlined paragraph, § 301.6241-1(a)(6)(iii) that includes all the items and amounts from the prior list, except as described in this section of this preamble. Third, the definition of partnership-related item was moved from proposed § 301.6241-6 and placed under the definition of “partnership adjustment” in § 301.6241-1(a)(6) to more closely track the statutory structure of section 6241(2).

The final regulations under § 301.6241-1(a)(6)(iii) maintain the rule from the proposed regulations that items or amounts shown or reflected, or required to be shown or reflected, on the return of the partnership are items or amounts with respect to the partnership. The final regulations also clarify that items or amounts in the partnership's book or records are items or amounts with respect to the partnership if those items or amounts are “required to be maintained” in the partnership's books and records. The phrase “required to be maintained” is added to account for items that may be maintained in the partnership's books and records on a voluntary basis. For example, a partnership may choose to maintain the outside basis of each of its partners in its books and records, even though the Code does not require this information be maintained by the partnership. The rule make clears that the voluntary recording of an item in the partnership's books is not determinative of the meaning of the phrase “item or amount with respect to the partnership.” A partnership cannot convert an item or amount that is not with respect to the partnership into an item or amount that is with respect to the partnership merely by including that item or amount in the partnership's books and records. This rule provides consistency among partnerships and more certainty regarding what items in the books and records of a partnership constitute items or amounts with respect to the partnership.

The final regulations do not retain the separate categories of items relating to transactions with, liabilities of, and basis in the partnership. Instead, the final regulations adopt a streamlined approach and provide that those items are only with respect to the partnership if those items are reflected, or required to be reflected, on the partnership's return or required to be maintained in its books and records. The separate treatment under the proposed regulations for these types of items and amounts was duplicative. Items or amounts relating to transactions with, liabilities of, and basis in the partnership are items or amounts shown or reflected, or would be required to be shown or reflected, on the partnership return or required to be maintained in the partnership's books and records. Accordingly, describing separate categories for such items was unnecessary and potentially confusing.

Under § 301.6241-1(a)(6)(iii), an item or amount is with respect to the partnership only if the item or amount is shown or reflected, or required to be shown or reflected, on the partnership return or required to be maintained in the partnership's books and records. Consistent with that interpretation, the final regulations provide an item or amount relating to transactions with, liabilities of, and basis in the partnership is with respect to the partnership only if the item or amount is reported, or required to be reported, on the partnership return or is required to be maintained in the partnership's books and records.

The term partnership-related item includes a partner's distributive share of items or amounts that are with respect to the partnership which are relevant in determining the chapter 1 tax of any person. Section 6241(2)(B)(ii). In taking into account the partner's distributive share of partnership-related items, a partner must apply the provisions of the Code to each partnership-related item to compute the partner's ultimate tax liability. The application of the Code to the partner's share of partnership-related items requires taking into account facts and circumstances that are unique to a particular partner. Generally speaking, those facts and circumstances are known only by the partner, are not known by the partnership, and are based on information only within the partner's control and outside of the partnership's control.

In an examination of items on a partner's return, the IRS generally needs information pertaining to the partner's specific facts and circumstances to determine the correctness of the items. The partner whose items are at issue is normally the best source for that type of information. While a partnership may possess some information about a particular partner's facts and circumstances, obtaining information from the partnership is generally not as efficient as obtaining information from the partner. Obtaining such information from the partner also preserves the privacy interests of the partner. Therefore, from both a taxpayer and tax administration standpoint, an examination of items for which application of the Code depends on a partner's particular facts and circumstances is, in general, best performed at the partner level, rather than the partnership level.

Under the TEFRA procedures, these types of items were considered affected items and adjustments to those items were computational adjustments. The centralized partnership audit regime is intended to have a scope sufficient to address those items that would have been considered partnership items, affected items, and computational adjustments under TEFRA, including the regulations. Joint Comm. on Taxation, JCX-6-18, Technical Explanation of the Revenue Provisions of the House Amendment to the Senate Amendment to H.R. 1625 (Rules Committee Print 115-66), 37 (2018) (JCX-6-18). One way to achieve a sufficiently broad scope is to attempt to define the term “partnership-related item” to include those items that would have been partnership items, affected items, and computational adjustments under TEFRA. For the following reasons, however, this approach was not adopted.

The centralized partnership audit regime is a fundamentally distinct system from TEFRA. While under both sets of rules adjustments are made at the partnership level and those adjustments are binding on partners, the framework for assessing and collecting tax resulting from those adjustments is significantly different. Under TEFRA, tax attributable to partnership items determined at the partnership level and tax attributable to affected items was assessed against the partners of the partnership through computational adjustments made by the IRS with respect to the partner. Computational adjustments were made either by mailing a notice of deficiency to the partner if factual determinations were necessary at the partner level or by directly assessing tax against the partner. The tax was assessed with respect to the year that was audited by the IRS, and assessments were required to be made within one year of the completion of the partnership-level proceeding.

Under the centralized partnership audit regime, adjustments to partnership-related items are similarly determined at the partnership level. In stark contrast to the TEFRA procedures, however, the tax attributable to those adjustments is also assessed and collected at the partnership level in the form of an imputed underpayment determined pursuant to section 6225. An imputed underpayment is assessed as if it were a tax imposed for the adjustment year, generally the year in which the adjustments are finally determined, instead of the year that was subject to examination. Section 6225(d). The partnership, not the partners, is liable for the imputed underpayment. A partnership may elect the alternative to payment of the imputed underpayment under section 6226 and “push out” the adjustments determined at the partnership level, in which case the tax attributable to the adjustments is assessed and collected from the partnership's partners. Unlike the TEFRA procedures, however, under the push out process, assessment and collection is initiated by the partner, rather than by the IRS, by the partner taking into account the partnership adjustments and self-reporting any tax due on the partner's next filed return, alleviating both the administrative and timing issues that arose in TEFRA. See section 2.A of the preamble to the June 2017 NPRM.

When calculating an imputed underpayment based on adjustments determined at the partnership level, taxpayer favorable adjustments are generally disregarded and the highest rate of tax is applied. This formula may produce an amount that is larger than the cumulative amount of tax the partners would have paid had the partners taken the adjustments into account separately, but it also relieves the IRS of the obligation to account for specific partner facts and circumstances when initially determining the imputed underpayment amount. During the modification phase, a partnership may, at its option, request that the imputed underpayment be modified to take into account partner tax attributes and facts and circumstances. See section 3.B. for further discussion.

When taking into account adjustments under section 6226, a partner determines the increase or decrease in tax that would have occurred if the adjustments were taken into account for the partner's tax year correlating to the year that was audited. For intervening years, any year between the audited year and the current year, the partner must determine the effect on tax attributes of the adjustments and the resulting increase or decrease that would have occurred for those years as well. The partner then adjusts her tax for the current year by the aggregate tax that would have resulted had the adjustments been properly taken into account. Under TEFRA, it was the IRS's burden to determine tax at the partner level. The centralized partnership audit regime, under section 6226, shifts that burden from the IRS to the partner. As a result, it is neither necessary nor efficient for the IRS to determine at the partnership level the facts and circumstances specific to a partner in order for that partner to determine the proper amount of tax in the case of a push out.

The rules for calculating an imputed underpayment under section 6225 and the computation rules under section 6226 are sufficiently broad to ensure that the tax attributable to items that would have been partnership items, affected items, and computational adjustments under the TEFRA is collected under the centralized partnership audit regime. When the partnership pays an imputed underpayment, the application of limitations and restrictions is assumed and favorable adjustments are disregarded unless a partnership demonstrates that partner tax attributes should override those assumptions. In this way, the imputed underpayment determination, including any modifications, sufficiently accounts for those types of items that would have been affected items or computational adjustments under TEFRA. Similarly, in the case of an election under section 6226, the re-computation process necessarily involves the application of items that would have been affected items or computational adjustments.

Because both the imputed underpayment rules and the section 6226 rules sufficiently address items that would have been partnership items, affected items, and computational adjustments, it is both unnecessary and over-inclusive to define partnership-related item to encompass all of those items. Accordingly, the final regulations clarify that the term partnership-related item does not include items or amounts that would have been TEFRA affected items or computational adjustments. The final regulations do this by defining “with respect to the partnership” to exclude items or amounts shown, or required to be shown, on a return of a person other than the partnership (or in that person's books and records) that result after application of the Code to a partnership-related item and that take into account the facts and circumstances specific to that person. Because these items and amounts are not with respect to the partnership, they are not partnership-related items the IRS must adjust at the partnership level. Two examples were added to the final regulations under § 301.6241-1(a)(6)(vi) to illustrate this rule.

The definition of “with respect to the partnership,” and by extension partnership-related item, under the final regulations preserves the centralized nature of the proceeding with respect to the partnership. During the partnership level proceeding under the centralized partnership audit regime, the IRS adjusts items that are germane to the partnership as an entity—that is, items reported by the partnership on its return or items in its books and records generally used for purposes of completing the return. The partnership has access to this information, and it is therefore, in general, most efficient to obtain this information from the partnership in the partnership level proceeding.

This rule also protects the tax and privacy interest of partners. Under section 6223, partners are bound by actions taken by the partnership in the partnership proceeding and by any final decision in the partnership proceeding. Unlike under TEFRA, individual partners do not have a right to participate in the partnership level administrative or judicial proceeding. If items based on the application of the Code to a particular partner based on that partner's facts and circumstances were items required to be determined at the partnership level, the partner may be unable to dispute adjustments to those items. And even if the partner were able to dispute adjustments to those items, the partner would need to divulge private information in a proceeding in which the partnership was the party, not the partner itself.

In addition, a rule that would require that such items and amounts be determined at the partnership level raises significant administrative concerns for the IRS. In general, the partnership would in most cases lack the facts necessary to determine items or amounts that depend on the facts and circumstances of the partners. By necessity, the IRS would be required to involve the partners in the examination to the extent the partner's items and amounts were at issue. Requiring the IRS to involve potentially the many partners in the entity level examination of the partnership would undermine the efficiencies of the centralized partnership audit regime's concept of the partnership representative and the binding nature of the partnership representative on the outcome of the entity level examination. Further, if the IRS did not examine all of the various items or amounts on the partners' returns during the partnership level proceeding, the IRS would, for each of the partners' items and amount that were also partnership-related items, be precluded from adjusting those items at the partner level outside of the centralized partnership audit regime. This would lead to an unnecessary expansion of partnership-level proceedings to encompass what could more simply and efficiently be resolved at the partner level for one or a small group of partners.

i. Comments Concerning Partnership-Related Item

One comment recommended that all partners should be audited as a group, but only about their financial involvement within the scope of the partnership. According to the comment, outside interests and income should not be determined at the partnership level. Although it is not entirely clear what the comment includes in the phrases “financial involvement within the scope of the partnership” and “outside interests and income”, the Treasury Department and the IRS understand this comment to be a request to limit the scope of the items that are “with respect to the partnership” for purposes of this section. Another comment suggested that the scope of the term “partnership-related item” should not be unreasonably broad, particularly with respect to partner-level items where the underlying issue is primarily of interest to the partner and not the partnership. The comment expressed concern that the partnership could have little interest in disputing a proposed adjustment that would have little impact to the partnership but could have a dramatic effect on a particular partner.

These comments were adopted as reflected in the changes to the definition of “with respect to the partnership” described in this section of this preamble. Under the final regulations, outside interests and income and partner-level items are not “with respect to the partnership” to the extent those are not items or amounts reflected, or required to be reflected, on the partnership return or required to be maintained in the partnership's books and records. In addition, the items or amounts that are “with respect to the partnership” as defined in § 301.6241-1(a)(6)(iii) are generally items concerning the partners' financial involvement within the scope of the partnership. Accordingly, adjustments to items concerning the partners' financial involvement within the scope of the partnership would generally be determined at the partnership level, and adjustments to items involving outside interests and income or partner-level items that result after application of the Code to a partnership-related item and that take into account facts and circumstances specific to the partner, to the extent provided for in this section, are not determined at the partnership level under the centralized partnership audit regime.

In addition to the revisions described earlier in this section of this preamble, the term imputed underpayment was moved from the definition of “item or amount is with respect to the partnership” to the definition of partnership-related item under § 301.6241-1(a)(6)(ii). This change clarifies that an imputed underpayment is always a partnership-related item. First, an imputed underpayment is a creation of the centralized partnership audit regime and can only arise under the centralized partnership audit regime. See sections 6225, 6226, and 6227. Second, the statute expressly defines an imputed underpayment as an item or amount that is with respect to the partnership. Section 6241(2)(B)(i). Third, an imputed underpayment is relevant in determining the liability of any person under chapter 1, as defined in § 301.6241-1(a)(6)(iv), because payment of the imputed underpayment by the partnership relieves the partners of any chapter 1 liability attributable to the reviewed year partnership adjustments.

2. Partner's Return Must Be Consistent With Partnership Return

Five comments were received concerning section 6222, regarding the requirement that a partner's return be consistent with the partnership return. The comments covered the following topics: Inconsistent treatment in the case of an amended return, an administrative adjustment request, or where no partnership return is filed; the form and method for identifying inconsistent treatment; proceedings to adjust identified, inconsistently reported items; and the election regarding consistent treatment with a schedule furnished to the partner by the partnership. In addition to responding to these comments, this section of the preamble describes changes to the language of § 301.6222-1(a)(2) regarding partners that are partnerships with an election in effect under section 6221(b).

A. Inconsistent Treatment on an Amended Return and Definition of Partner's Return for Purposes of § 301.6222-1

One comment recommended that the regulations clarify that a partner may file an amended return in order to take a position inconsistent with the filed partnership return as long as such amended return includes a statement identifying the inconsistent treatment. Under section 6222(a), a partner shall, on the partner's return, treat each partnership-related item in a manner that is consistent with the treatment of such item on the partnership return. Proposed § 301.6222-1(a) provided that the treatment of partnership-related items on a partner's return must be consistent with the treatment of such items on the partnership return in all respects, including the amount, timing, and characterization of such items. The term “partner's return” is not defined in either section 6222(a) or proposed § 301.6222-1(a).

Section 6222(a) and § 301.6222-1(a) are designed to ensure consistent treatment of partnership-related items on partners' returns and the partnership return filed with the IRS, except for cases where the partner notifies the IRS of the inconsistency. The requirement to be consistent with the partnership return extends to each return filed by the partner that reflects, or is required to reflect, partnership-related items. This includes both original and amended returns. Any other application of this requirement would render the requirement of consistency meaningless. For example, a partner could file a return on April 15 taking a consistent position, only to turn around on April 16 and file an amended return taking an inconsistent position.

To clarify that the consistency requirement under section 6222(a) and proposed § 301.6222-1(a) applies to each return of the partner, the final regulations provide that the term “partner's return” for purposes of § 301.6222-1 includes any return, statement, schedule, or list, and any amendment or supplement thereto, filed by the partner with respect to any tax imposed by the Internal Revenue Code. Accordingly, pursuant to § 301.6222-1(a), a partner on either an original or an amended return must treat partnership-related items consistently with how those items were treated on the partnership return filed with the IRS.

The clarification of the term “partner's return” also addresses the comment's suggestion that the regulations permit inconsistent treatment on an amended return provided the IRS is notified of that inconsistent treatment. Under § 301.6222-1(c)(1), the requirement that a partner treat a partnership-related item consistently with the partnership's treatment of that item, and the effect of inconsistent treatment, do not apply to partnership-related items identified as inconsistent (or that may be inconsistent) in a statement attached to the partner's return on which the partnership-related item is treated inconsistently. As clarified in these final regulations, the term partner's return for purposes of § 301.6222-1 includes any amendment to the partner's original return. Accordingly, so long as a partner notifies the IRS of an inconsistent treatment, in the form and manner prescribed by the IRS, by attaching a statement to the partner's return—including an amended return—on which the partnership-related item is treated inconsistently, the consistency requirement under § 301.6222-1(a), and the effect of inconsistent treatment under § 301.6222-1(b), do not apply to that partnership-related item.

i. Limitations on Filing Amended Returns Reporting Inconsistent Positions

When a partner on an amended return treats a partnership-related item inconsistently with how the item was treated on the partnership return, the partner is making a request for an administrative adjustment of that partnership-related item. Accordingly, the rule under proposed § 301.6227-1(a) that provided a partner may not request an administrative adjustment of a partnership-related item was revised to account for situations in which on an amended return a partner treats a partnership-related item inconsistently with the partnership return pursuant to § 301.6222-1(c)(1).

Section 6227(c) provides that in no event may a partnership file an AAR after a notice of an administrative proceeding with respect to the taxable year is mailed under section 6231. Consistent with section 6227(c), proposed § 301.6227-1(b) provided that no AAR may be filed after a NAP has been mailed by the IRS, except as provided in § 301.6231-1(f) (regarding withdrawal of a NAP). To give effect to this rule in the context of inconsistent treatment, the final regulations under § 301.6222-1(c)(5) provide that a partner may not notify the IRS that the partner is treating an item inconsistently with the partnership return for a taxable year after a NAP with respect to such partnership taxable year has been mailed by the IRS under section 6231. This rule clarifies that once the IRS initiates an administrative proceeding with respect to a partnership taxable year, any adjustment to a partnership-related item for that year must be determined exclusively within that partnership-level proceeding in accordance with section 6221(a). Neither the partnership, through filing an AAR, nor a partner, by taking an inconsistent position, may adjust a partnership-related item outside of that proceeding. Any actions taken by the partnership and any final decision in the proceeding are binding on the partnership and all its partners. Section 6223(b).

B. Inconsistent Treatment in the Case of an Administrative Adjustment Request

Proposed § 301.6222-1(c)(2) provided that the notification procedures under § 301.6222-1(c) do not apply to a partnership-related item the treatment of which is binding on the partner because of actions taken by the partnership, or because of any final decision in a proceeding with respect to the partnership, under the centralized partnership audit regime. Accordingly, under proposed § 301.6222-1(c)(2), the provisions of § 301.6222-1(c) did not apply with respect to the partner's treatment of a partnership-related item reflected on an AAR. This meant that a partner could not treat an item inconsistently with how such item was treated on an AAR. One comment recommended that the regulations under § 301.6222-1(c)(2) be revised to permit a partner to notify the IRS of an inconsistent position taken with respect to an item reported on an AAR. This comment was adopted.

Under section 6223(b), all partners are bound by actions taken by the partnership and by any final decision with respect to the partnership under the centralized partnership audit regime. In the case of an AAR, section 6223(b) binds each partner to the partnership's making of the request itself and the mechanism by which the adjustments requested are taken into account, including any election by the partnership to have the partners take into account the adjustments. Accordingly, if the partnership takes into account the adjustments by paying an imputed underpayment, the partners must follow the rules under section 6225. If there is no imputed underpayment or if the partnership elects to have the partners take into account the adjustments, the partners must follow the procedures under § 301.6227-3.

When taking into account AAR adjustments under § 301.6227-3, partners must adhere to the consistency requirements under section 6222(a). See § 301.6222-1(a)(4) (providing consistency requirement applies to the treatment of a partnership-related item on an AAR). Nothing in sections 6222, 6223(b), or 6227, however, precludes a partner from notifying the IRS the partner is taking an adjustment into account inconsistently with how the adjusted item was treated in an AAR. While section 6227 imposes certain requirements with respect to AARs, none of those requirements contradict section 6222(c)'s exception to the consistency requirement. Accordingly, the final regulations under § 301.6222-1(c)(2) remove the language stating that the provisions of § 301.6222-1(c)(1) do not apply with respect to a partner's treatment of a partnership-related item reflected on an AAR. In addition, the final regulations under § 301.6227-1 remove the rule under proposed § 301.6227-1(f) regarding the binding nature of an AAR. As a result of these changes, a partner may notify the IRS it is treating an AAR-adjusted item inconsistently in accordance with the provisions of § 301.6222-1(c).

The final regulations under § 301.6222-1(c)(2) maintain the language stating that the provisions of § 301.6222-1(c)(1) do not apply to a partner's treatment of an item reflected on a statement under section 6226 filed by the partnership with the IRS. A cross-reference to § 301.6226-1(e) was also added. In addition, the final regulations clarify that the provisions of § 301.6222-1(c)(1) do not apply to any item the treatment of which is binding on the partner because of an action taken by the partnership or because of a final decision in a proceeding under the centralized partnership audit regime with respect to the partnership. Section 6223(b). Items reflected on a statement under section 6226 filed with the IRS are an example of such items.

C. Inconsistent Treatment When No Partnership Return is Filed

Proposed § 301.6222-1(a)(3) provided that a partner's treatment of a partnership-related item attributable to a partnership that does not file a return is per se inconsistent, unless the partner files a notice of inconsistent treatment in accordance with proposed § 301.6222-1(c). One comment recommended that the regulations include an example to illustrate the outcome of the application of the rule under proposed § 301.6222-1(a)(3). The comment observed that without a return filed by the partnership, there would not be a return with which to make the partner's return consistent. To illustrate the application of § 301.6222-1(a)(3), Example 7 was added under § 301.6222-1(a)(5).

In light of the comment, the final regulations under § 301.6222-1(b)(1) include the clarification that where a partnership has failed to file a return, any treatment of a partnership-related item on a partner's return may be removed, and the IRS may determine any underpayment of tax resulting from such adjustment.

Lastly, the final regulations eliminate the phrase “unless the partner files a notice of inconsistent treatment in accordance with proposed § 301.6222-1(c)” from proposed § 301.6222-1(a)(3). This change clarifies that a partner's treatment of an item attributable to a partnership that has not filed a return is per se inconsistent, even if the partner notifies the IRS of the inconsistent treatment. The notification under § 301.6222-1(c) turns off the consistency requirement, but it does not change, as a factual matter, that the partner reported inconsistently.

D. Form and Method for Identifying Inconsistent Treatment of a Partnership-Related Item

Under proposed § 301.6222-1(c)(1), in addition to the requirement that a statement identifying an inconsistent treatment must be attached to the partner's return on which the item is treated inconsistently, the statement must be provided to the IRS according to the forms, instructions, and other guidance prescribed by the IRS. One comment asked about the form and method for providing the IRS with the statement described in proposed § 301.6222-1(c)(1) and suggested specific format guidance in the regulations would assist the public in reporting an inconsistent treatment. This comment was not adopted.

The final regulations maintain the rule that a partner must provide the statement described in § 301.6222-1(c)(1) in accordance with forms, instructions, and other guidance prescribed by the IRS. Prescribing the form and method for notifying the IRS of inconsistent treatment through forms, instructions, and other sub-regulatory guidance allows the IRS the flexibility to update its procedures for identifying an inconsistency as appropriate and necessary without the IRS having to amend the regulations. This flexibility preserves government resources and also expedites the guidance process for taxpayers to be aware of changes in IRS procedures. Accordingly, the final regulations do not provide a specific form or method for identifying inconsistent treatment.

The same comment asked whether a statement identifying inconsistent treatment can only be filed contemporaneously with the partner's tax return. Proposed § 301.6222-1(c) provided that a statement does not identify an inconsistency unless it is attached to the partner's return on which the partnership-related item is treated inconsistently. Because the plain language of proposed § 301.6222-1(c) made clear that the statement identifying inconsistent treatment must be attached to a return, no change was made in response to this comment.

E. Proceeding To Adjust an Identified, Inconsistently Reported Item

If a partner fails to satisfy the requirements of § 301.6222-1(a), the IRS may adjust the inconsistently reported partnership-related item on the partner's return to make it consistent with the treatment of such item on the partnership return, unless the partner provides notice of the inconsistent treatment in accordance with § 301.6222-1(c). See § 301.6222-1(b). Under proposed § 301.6222-1(c)(4)(i), if a partner notifies the IRS of an inconsistent treatment of a partnership-related item in accordance with proposed § 301.6222-1(c)(1) and the IRS disagrees with that inconsistent treatment, the IRS may adjust the identified, inconsistently reported item in a proceeding with respect to the partner. Nothing in proposed § 301.6222-1(c)(4)(i) precluded the IRS, however, from also conducting a proceeding with respect to the partnership.

One comment recommended that § 301.6222-1(c)(4)(i) provide that if the IRS does conduct a proceeding with respect to the partnership to adjust an identified, inconsistently reported item, the IRS may include within that proceeding the partner who provided notice of inconsistent treatment. The comment was concerned that the regulations provided partners who identified inconsistent treatment an automatic right to contest the IRS's adjustment through deficiency proceedings, which would result in more partner-level proceedings and which would be contrary to the intent of the centralized system. According to the comment, the recommended rule would allow the IRS to avoid conducting separate partnership and partner proceedings by allowing the IRS to include notifying partners in the partnership-level proceeding, rather than engaging such partners through deficiency procedures.

Proposed § 301.6222-1(c)(4)(i) provided that the IRS may adjust an identified, inconsistently reported item in a proceeding with respect to the partner. The IRS is not required to make that adjustment. The IRS may instead choose to make the adjustment in a proceeding with respect to the partnership. To the extent the comment was suggesting the IRS must adjust an identified, inconsistently reported item in a proceeding with respect to the partner, the comment was not correct.

If the IRS conducts a proceeding with respect to the partnership, that proceeding will include only the IRS, the partnership, and the partnership representative who is acting on behalf of the partnership. No partner, except a partner that is the partnership representative, or any other person may participate in the partnership proceeding without permission of the IRS. See § 301.6223-2(d)(1). Accordingly, while a partner is not generally included in a proceeding with respect to the partnership under the centralized partnership audit regime, the IRS has the authority under § 301.6223-2(d)(1) to allow any other person, including a partner who notified the IRS of inconsistent treatment, to participate in a partnership-level proceeding. Because that authority exists under § 301.6223-2, a separate rule within § 301.6222-1 to allow notifying partners to be included in a partnership-level proceeding is unnecessary. Therefore, the revision to proposed § 301.6222-1(c)(4) as recommended by the comment was not adopted.

All partners, including partners that have filed a notice of inconsistent treatment, are bound by the actions of the partnership and any final decision in a proceeding with respect to the partnership under the centralized partnership audit regime. See section 6223(b). To clarify the application of this rule in the case of a partnership-level proceeding to adjust an identified, inconsistently reported item, proposed § 301.6222-1(c)(4) was revised to provide that where the IRS conducts a proceeding with respect to the partnership, and there is no proceeding with respect to the partner regarding an identified, inconsistently reported partnership-related item, the partner is bound to actions by the partnership and any final decision in the partnership proceeding.

Another comment suggested that the regulations clarify what happens when the IRS conducts a proceeding with respect to the partnership under § 301.6222-1(c)(4)(i) and at the conclusion of that proceeding, the IRS accepts the partnership return as filed. The comment suggested the regulations address what procedures apply for collection of an imputed underpayment in that scenario or for collection of tax from the partner that filed inconsistently. This comment was not adopted.

First, because there is no partnership adjustment in the scenario described, there is also no imputed underpayment to collect from the partnership. Additionally, because there is no imputed underpayment, the partnership cannot make a push out election. See section 4.A.iii of this preamble. With respect to collection of tax from the partner, nothing in the regulations prevents the IRS, when it conducts a proceeding with respect to the partnership under § 301.6222-1(c)(4)(i), from also conducting a proceeding with respect to the partner to adjust an identified, inconsistently reported item. Accordingly, no changes were made in response to this comment.

F. Consistent Treatment With Schedule Furnished to the Partner by the Partnership

Under proposed § 301.6222-1(d)(1), a partner is treated as having notified the IRS of treating a partnership-related item inconsistently if the partner demonstrates that the treatment of such item on the partner's return is consistent with the treatment of that item on the statement, schedule, or other form prescribed by the IRS and furnished to the partner by the partnership, and the partner makes a valid election under proposed § 301.6222-1(d)(2). This election must be filed no later than 60 days after the date of such notice. Proposed § 301.6222-1(d)(2). One comment recommended that the regulations provide that this 60-day period may be extended with approval by the IRS. This comment was not adopted.

The IRS may assess and collect any underpayment of tax resulting from an adjustment to conform an inconsistent position in the same manner as if the underpayment were on account of a mathematical or clerical error appearing on the partner's return, except that the procedures under section 6213(b)(2) for requesting abatement of an assessment do not apply. The 60-day period under § 301.6222-1(d)(2) is designed to allow a partner to demonstrate consistency with the information furnished to the partner by the partnership and corresponds to the 60-day period the partner would have had to request abatement if section 6213(b)(2) were applicable. Notably, section 6213(b)(2) does not provide for any extensions of time. Accordingly, the 60-day period under § 301.6222-1(d)(2) affords the partner an opportunity to contest the IRS's conforming adjustment the partner would not have otherwise had.

Additionally, the 60-day period is a reasonable amount of time for the partner to demonstrate consistency with the information it has received from the partnership. At the time the partner is notified by the IRS of the inconsistent treatment, the partner should be in possession of any statements, schedules, or forms furnished to the partner by the partnership. If the partner were permitted to request abatement, the partner would likewise only have 60 days. Furthermore, if the partnership is made aware by the partner that an item was treated incorrectly on the partnership return or the schedules furnished by the partnership, the partnership has the ability to file an AAR with respect to the partnership-related item.

Another comment suggested guidance is needed as to how the election under proposed § 301.6222-1(d)(2) is made. Proposed § 301.6222-1(d)(2)(i) provided that the election must be filed in writing with the IRS office set forth in the notice that notified the partner of the inconsistency. Proposed § 301.6222-1(d)(2)(ii) provided the election must be clearly identified as an election under section 6222(c)(2)(B); signed by the partner making the election; accompanied by a copy of the incorrect statement and IRS notice that notified the partner of the inconsistency; and include any other information required in forms, instructions, or other guidance prescribed by the IRS.

The comment did not suggest what further guidance should be provided in the regulations. Deferring further guidance to forms, instructions, and other sub-regulatory guidance allows the IRS the flexibility to update its procedures as appropriate and necessary without the IRS having to amend the regulations. As discussed earlier in this section of this preamble, this flexibility preserves government resources and also expedites the guidance process for taxpayers to be aware of changes in IRS procedures. Accordingly, proposed § 301.6222-1(d)(2) was not revised in response to this comment.

G. Effect of Inconsistent Treatment When Partner is a Partnership

Proposed § 301.6222-1(a)(2) provided that the rules of § 301.6222-1 apply to a partnership-partner regardless of whether the partnership-partner has made an election under section 6221(b) to elect out of the provisions of the centralized partnership audit regime. The final regulations clarify that the rules of § 301.6222-1 apply to all partners including partnership-partners that have elected out of the centralized partnership audit regime and revise the language referring to such partners to better conform to similar references in other regulation sections.

Proposed § 301.6222-1(b)(3) provided a rule regarding the effect of inconsistent treatment where the partner is itself a partnership and also provided a cross-reference to the rules under section 6232(d)(1)(B) and § 301.6232-1(d). To better conform the two sets of rules and to reduce any potential confusion between the provisions, the final regulations eliminate the rule under § 301.6222-1(b)(3) in favor of providing only a cross-reference to the rules under section 6232(d)(1)(B) and § 301.6232-1(d).

3. Determination of an Imputed Underpayment, Modification of an Imputed Underpayment, and Adjustments That Do Not Result in an Imputed Underpayment

Twenty comments were received concerning section 6225 and the rules regarding imputed underpayments. This section 3 addresses the comments concerning the determination of an imputed underpayment under proposed § 301.6225-1; modification of an imputed underpayment under proposed § 301.6225-2; and the rules regarding how adjustments that do not result in an imputed underpayment are taken into account in accordance with proposed § 301.6225-3. As discussed in the Background, comments concerning the rules regarding basis and tax attributes under proposed § 301.6225-4 will be addressed in future guidance.

A. Determination of an Imputed Underpayment

Section 6225(b)(1)(B) provides that the determination of any imputed underpayment is made by “applying the highest rate of tax in effect for the reviewed year under section 1 or 11.” Consistent with section 6225(b)(1)(B), proposed § 301.6225-1 provided that an imputed underpayment is determined by multiplying the total netted partnership adjustment by the highest rate of federal income tax in effect for the reviewed year under section 1 or 11 and increasing or decreasing that product by certain adjustments to credits and creditable expenditures.

One comment stated that the statute's use of the highest marginal tax rate to calculate the imputed underpayment is unfair to taxpayers who may not be taxed at the highest marginal rate, particularly with respect to adjustments for qualified dividends or capital gains, where a partner is subject to the alternative minimum tax, or where a partner is a tax-exempt entity. To the extent the comment was suggesting that the regulations use a rate different than the rate prescribed in the statute to compute an imputed underpayment, the comment was not adopted. Section 6225(b)(1)(B)'s mandate to “apply the highest rate of tax in effect for the reviewed year under section 1 or 11” is unambiguous, and there is no exception from application of the highest rate for any particular partnership or for any specific type of partner, such as an exception that takes into account unique circumstances of specific partners. Because application of the highest rate is established by statute, the regulations also apply the highest rate of tax to determine an imputed underpayment under section 6225(b).

A partnership and its partners may be able to reduce the rate used in computing an imputed underpayment by requesting modification under section 6225(c). For example, the partnership may request modification under § 301.6225-2(d)(3) with respect to partnership adjustments that are allocable to a tax-exempt entity or modification under § 301.6225-2(d)(4) with respect to adjustments to capital gains or qualified dividends that are attributable to an individual. The partnership may also make a push out election under section 6226, allowing partners to take into account the adjustments and pay tax using their respective marginal tax rates, including taking into account the effect of the alternative minimum tax.

Proposed § 301.6225-1(a)(1) provided that each imputed underpayment determined under § 301.6225-1 is based solely on partnership adjustments with respect to a single taxable year. One comment recommended that the regulations allow adjustments that move income or expense from one year to another to be netted for purposes of computing the imputed underpayment amount. This comment was not adopted.

The comment described an example in which the IRS determines that the partnership should have reported income in year 1 that was originally reported in year 2. The increase in income for year 1 results in an imputed underpayment. The decrease in income in year 2 is an adjustment that does not result in an imputed underpayment pursuant to § 301.6225-1(f)(1)(i), and the partnership and its partners take into account the decrease in income in the adjustment year pursuant to § 301.6225-3. One partner in the comment's example reports income from other sources in the adjustment year; the other partner does not report income from other sources.

Section 6225(b) sets forth the rules for determining an imputed underpayment. The statutory structure of section 6225(b) is premised on the concept that an imputed underpayment is determined with respect to a reviewed year and that adjustments with respect to the reviewed year result in such imputed underpayment or are adjustments that do not result in an imputed underpayment. Section 6225(a). Section 6225(b)(1)(A) expressly provides that “any imputed underpayment with respect to any reviewed year shall be determined by the Secretary by appropriately netting all adjustments with respect to such reviewed year . . . .” (emphasis added). The statute does not reference adjustments with respect to any year other than the reviewed year. Accordingly, a rule that allows for the netting of adjustments across tax years is not consistent with the statutory language of section 6225(b)(1)(A).

In addition, netting across multiple tax years would not constitute “appropriately netting” within the meaning of section 6225(b)(1)(A). A fundamental federal income tax principle is that each taxable year stands alone. Commissioner v. Sunnen, 333 U.S. 591 (1948) (“Income taxes are levied on an annual basis. Each year is the origin of a new liability and of a separate cause of action.”). A rule that provides for netting across tax years ignores this fundamental principle. For netting to be appropriate, it must take into account general principles of federal income tax laws as well as the provisions of the Code. Allowing an adjustment from one taxable year to offset or net with an adjustment from another taxable year when determining an imputed underpayment contravenes both the general tax principle that each year stands alone and is not supported by the plain language of section 6225. These principles are particularly significant in the context of partnerships given that partners' interests and the identity of partners can vary from year to year. Because adjustments relating to multiple years may affect items that are allocable to different partners or in different amounts, it would be particularly inappropriate to offset those types of adjustments against each other when determining the imputed underpayment.

Furthermore, a timing adjustment, such as the one described in the comment's example, often has effects that must be reflected in each taxable year's return. Allowing such adjustments to net against each other could inappropriately negate those effects. For instance, an adjustment that shifts a depreciation deduction from one year to another year might have the effect of changing a taxpayer's status from being in a loss posture to being in a gain posture for the year from which the loss is being shifted. Although in some cases a gain in one year might effectively offset a loss in another year, such a result cannot be known without an analysis of each of the partners' specific circumstances. As discussed later in section 3.A.i. of this preamble, requiring the IRS to review each partner's specific circumstance in order to determine the imputed underpayment is the type of inquiry that the centralized partnership audit regime was designed to avoid.

A rule that allows for automatic netting of adjustments across tax years also ignores the limitation in section 6225(b)(4) and would create significant administrative burdens for the IRS. Section 6225(b)(4) provides that if any adjustment would result in a decrease in the amount of the imputed underpayment and could be subject to any additional limitation under the Code if taken into account by any person, such adjustment should not be taken into account in the netting process described in section 6225(b)(1)(A). This provision codifies the presumption that, except as otherwise provided, taxpayer favorable adjustments subject to any possible limitation under the Code if taken into account by any person are disregarded when determining an imputed underpayment. The statute does not require the IRS to determine whether taxpayer favorable adjustments are in fact subject to such limitations. A rule allowing for netting across tax years would, however, require the IRS to make such determinations. This would have the effect of inappropriately expanding the number of tax years and partnership adjustments potentially at issue in the partnership-level proceeding. Not only would that result undermine the limitation under section 6225(b)(4), it would also unnecessarily complicate the partnership examination, creating potential burdens for both the IRS and the partnership.

A rule allowing adjustments to offset across years would also create administrative burdens for both the IRS and for taxpayers because it would require determining the identity of the partners affected by the adjustment. While in some cases a lack of partner turnover may make that determination less burdensome, in other cases where there is a high turnover of partners or where special allocations are involved, the determination becomes more difficult. Establishing a rule that allows netting of adjustments across tax years as a general matter fails to take into account the differing make-up of partnerships and their partners. For instance, assume a case where there is a high turnover of partners, adjustments are determined across multiple reviewed years, and the rules allow netting of those adjustments to form a single imputed underpayment. If the partnership requested to modify that imputed underpayment, it would be unclear which partners would be required to participate in modification and if the partnership made a push out election with respect to the imputed underpayment, it would be unclear which partners would be furnished statements under § 301.6226-2.

Lastly, as a practical matter, the IRS may not examine each relevant partnership taxable year. If an adjustment results in moving a partnership-related item from one taxable year to another, the IRS may examine the other taxable year, but the IRS is not required to. Providing a rule requiring the IRS to take into account other taxable years when netting adjustments would effectively require the IRS to examine all of the partnership's open taxable years, which would result in a significant administrative burden to the IRS and the partnership subject to the administrative proceeding. If netting across tax years was allowed, but the IRS did not examine all relevant years, different partnerships would receive different, and potentially distorted, netting results. For instance, a partnership under examination for multiple taxable years could potentially benefit from netting across those taxable years, but a partnership under examination for only one taxable year would not receive the same benefit. The determination of an imputed underpayment amount for any one year should not be dependent on the number of partnership taxable years the IRS examines.

Accordingly, a rule that allows adjustments to net across taxable years is inconsistent with the statutory language of section 6225(b)(1)(A), contravenes general tax principles, creates administrative burdens for the IRS, and inappropriately affects the timing and netting of certain partnership-related items. Therefore, the final regulations under § 301.6225-1(a)(1) maintain the requirement that an imputed underpayment be based solely on partnership adjustments with respect to a single taxable year.

i. Grouping, Subgrouping, and Netting of Partnership Adjustments

Several comments provided recommendations regarding the grouping, subgrouping, and netting rules under proposed § 301.6225-1(c), (d), and (e). In order to determine an imputed underpayment, each partnership adjustment determined by the IRS is first placed into one of four groupings pursuant to § 301.6225-1(c) according to the type of partnership-related item being adjusted: The reallocation grouping, the credit grouping, the creditable expenditure grouping, or the residual grouping. Adjustments are then subgrouped, if appropriate, and netted to produce the total netted partnership adjustment. Proposed § 301.6225-1(b)(2), (d) and (e).

One comment stated that the grouping and netting procedures are broad, vague, and generally err on the side of maximizing tax revenue resulting from an audit without regard to generally applicable provisions of the Code. The design of section 6225(a) and (b) and the grouping and netting rules under § 301.6225-1 is to create an imputed underpayment amount that is based on the highest rate of tax and that disregards any taxpayer favorable adjustments which would otherwise reduce the imputed underpayment. Given this formula, an imputed underpayment determined under § 301.6225-1 will likely reflect an amount that is larger than the cumulative amount of tax the partners would have paid if the partners took the partnership adjustments into account separately.

This formula is a feature of section 6225(a) and (b). The statute expressly disregards certain adjustments that may be subject to limitations and that would otherwise reduce the imputed underpayment and mandates the application of the highest applicable tax rate. Section 6225(b)(1)(B), (2) and (4). The proposed regulations followed these statutory mandates. By removing the obligation on the IRS to consider partners' facts and circumstances, such as whether adjustments that would otherwise reduce the imputed underpayment might be allowed at the partner level or whether adjustments might be taken into account by partners at a rate lower than the highest rate, section 6225(b) shifts the burden from the IRS during this phase of a partnership examination. Because the imputed underpayment determined at this phase in the examination is not required to reflect the facts and circumstances of the ultimate partners, modifications may be necessary to more closely reflect the proper tax treatment.

After the preliminary determination of the imputed underpayment amount under § 301.6225-1, the burden is shifted to the partnership to utilize the modification procedures under § 301.6225-2 if the partnership so chooses. Modification is designed to allow the partnership and its partners to arrive at an imputed underpayment amount that is closer to the correct amount of tax while maintaining the assessment and collection efficiencies of a centralized audit process. See Joint Comm. on Taxation, JCS-1-16, General Explanations of Tax Legislation Enacted in 2015, 65-66 (2016) (JCS-1-16). As an alternative to modification and paying an imputed underpayment, the partnership can elect under section 6226 to push out the adjustments to its partners. Both modification and the push out election provide the opportunity to establish that the correct amount of tax is collected from the partnership and its partners. Accordingly, the final regulations under § 301.6225-1 were not revised in response to the comment's concern about maximizing revenue.

With respect to the comment's concerns that the grouping and netting procedures are broad and vague and disregard generally applicable tax laws, to the extent those concerns related to the scope of the centralized partnership audit regime and what determinations and adjustments are made at the partnership level, see section 1 of this preamble. To the extent the comment's concerns related to the fact that the regulations do not address every possible grouping and netting scenario, the regulations do so intentionally. The Treasury Department and the IRS have determined it is not reasonable to identify within the regulations all possible permutations of adjustments and partnership facts and circumstances that might affect how an imputed underpayment is calculated. Accordingly, the regulations provide general rules that apply to various scenarios that could arise in the examination process. The general nature of the grouping, subgrouping, and netting rules also allow for the regulations to adapt to future changes to the Code.

Notwithstanding the rules' flexible nature, they are rooted in provisions of the Code and regulations that are generally applicable to partnerships and partners. The regulations require that adjustments be placed into groupings and subgroupings based on how the adjusted items are treated pursuant to the Code, the regulations, forms, instructions, and other guidance and do not generally permit the netting of adjustments that might otherwise be subject to limitations or restrictions under the tax laws. Accordingly, the grouping and netting rules are designed with regard to generally applicable provisions of the Code. For further discussion of the comment's concerns regarding the grouping and netting rules and the interaction with generally applicable tax laws, see section 3.A.ii. of this preamble.

One comment suggested that the regulations should allow partners to supply information to the partnership and require that the partnership and the IRS apply this information in calculating the imputed underpayment. The comment also suggested there be a procedure for partners who are passive investors with respect to the partnership to have an opportunity to claim passive losses for net partnership adjustments on audits that increase income and cause the partnership to pay tax on their behalf.

As discussed earlier in this section of this preamble, the tax attributes of the partnership's partners generally do not factor into the preliminary determination of the imputed underpayment. Rather, the imputed underpayment determined under § 301.6225-1 is computed without regard to the partners' tax circumstances, for example whether a partner would be able to offset additional partnership income with additional deductions or whether a partner's tax attributes would reduce the amount of tax due as a result of the adjustments. See section 6225(b)(1)(B), (2) and (4). Modification as described under section 6225(c) and § 301.6225-2 is the more appropriate stage of the examination for the IRS to take into account specific partner tax attributes. Requiring the IRS to review the tax attributes of each partner within the context of the first phase of the partnership examination would undermine the centralized nature of the examination process. The comment's' recommendation to allow partners to present information during the partnership audit and require the IRS to incorporate that information into the imputed underpayment calculation would require the IRS to review and evaluate partner tax attributes in a way that would significantly impede upon the exam and create numerous administrative burdens for the government.

Notwithstanding these challenges, proposed § 301.6225-1(c)(1) and (d)(1) provided that the IRS may, in its discretion, place adjustments in groupings and subgroupings in a manner different from that described in the proposed regulations to appropriately reflect the facts and circumstances of each examination. This rule is intended to allow the partnership to provide information to the IRS to demonstrate that certain partner tax attributes should be taken into account when grouping and subgrouping to achieve a more appropriate netting of the adjustments.

The regulations give the IRS the discretion to decide whether or not to use this information in the initial examination phase, that is, prior to modification. This discretion is necessary because the partnership and the IRS may not agree as to whether the groupings and subgroupings requested by the partnership are appropriate. Requiring the IRS and the partnership to resolve such disagreements within the context of the first phase of the partnership proceeding would take time and resources away from the audit and thereby recreate the same problems associated with introducing partner tax attributes into the partnership level exam. If the partnership and the IRS do not agree on the groupings and subgroupings recommended by the partnership during the exam, the partnership is not without recourse. The partnership may request during modification that the IRS include one or more partnership adjustments in a particular grouping or subgrouping or request that certain partnership adjustments be treated as if no limitations or restrictions apply with the result those adjustments may be subgrouped with other adjustments. See § 301.6225-2(d)(6).

Accordingly, modification is generally the appropriate point in the administrative phase at which partner tax attributes may be raised by the partnership and considered by the IRS. For example, the partnership and its partners can utilize the amended return procedure or the alternative procedure to filing amended returns, which require partners to take the adjustments into account in light of their individual tax attributes. Those procedures would potentially allow partners to offset passive income with any passive losses, consistent with the procedure recommended by the comment. In the alternative, the partnership may elect to push out the adjustments under section 6226, and the partners would be required to take into account the adjustments and any effects on the partners' tax attributes. At that stage, the partners could use passive losses to the extent permitted by the rules under § 301.6226-3 (regarding how partners take into account pushed out adjustments).

Although the IRS is permitted to consider partner tax attributes during the first phase of the partnership exam, the statute and the regulations provide clear guidance on the modification process and specifically how a partnership may request that partners' tax attributes be taken into account to reduce the imputed underpayment. Limiting the requirement that the IRS consider such information to the modification stage is efficient for both the IRS and the partnership because it ensures that the first phase of the exam is focused on the substance of what adjustments must be made at the partnership level, rather than on specific partner attributes.

For these reasons, the comment suggesting a rule that permits partners, as a matter of right, to present information regarding their tax attributes during the partnership audit is not adopted. However, a partnership may request that the IRS take into account facts and circumstances relating to its partners pursuant to the rules under § 301.6225-1(d)(1) and (e)(1), which may allow for more appropriate grouping and subgroupings of adjustments. The comment's recommendation that the IRS be required to apply such information during the netting process was not adopted. The partnership may, however, request during modification to reduce the amount of the imputed underpayment based on the partners' specific tax attributes.

Another comment stated the proposed regulations create a divergence between the imputed underpayment amount and the cumulative amount that the reviewed year partners would have to pay if the adjustments were allocated to them. The comment described two situations to illustrate this concern. In the first situation, one adjustment increases ordinary income, and another adjustment decreases capital gain. The comment concludes that because the proposed regulations do not allow the decrease in capital gain to be netted against the increase in ordinary income, the partners may have overpaid tax with respect to the capital gain. In the second situation, one adjustment increases capital gain, and another adjustment decreases ordinary income. The comment concludes that because the proposed regulations do not allow the decrease in ordinary income to be netted against the increase in capital gain, the partners may have overpaid tax with respect to the ordinary income. The comment suggested that the Treasury Department and the IRS should ensure that the government does not seek an increase in tax collections solely because the partnership bears the burden for the tax. This comment was not adopted because its conclusions are based on assumptions that may not apply in all situations and section 6225(b)(1)(A) requires that adjustments are “appropriately netted” taking into consideration the further limitation of section 6225(b)(4) which does not permit the netting of adjustments that would reduce the imputed underpayment with other adjustments. The comment's suggestion presents the same issues described earlier in this section of the preamble regarding the introduction of partner tax information in the partnership level proceeding.

The comment's conclusions that the partners may have overpaid tax with respect to the decreased capital gain or the decreased ordinary income may be true in some cases. Without a review of the partners' accounts or some affirmation from the partners that they did pay tax, the IRS cannot be certain this is true in all cases or any one particular case. For example, a partner may have been in an overall loss position for the taxable year, may not have originally reported the decreased item, or may not have filed a return. As discussed earlier in this section of this preamble, the initial phase of the examination is not designed for the IRS to consider the specific circumstances of any partners. A rule requiring the IRS to consider specific partner circumstances would require the IRS to review each partner's account and prior returns to ensure that the partner previously took an item into account and paid tax on that item. Such a rule would create significant burden on the IRS during the initial exam phase and undermine a core aspect of the centralized partnership audit regime's shifting of the burden from the IRS to the partnership and its partners. As discussed earlier in this section of this preamble, a partnership may request that tax attributes are accounted for by using the modification procedures or the partnership may make the election under section 6226.

The comment also appears to conclude that if all partnership adjustments were netted, the imputed underpayment would result in some number closer to the amount the reviewed year partners would have to pay if the adjustments were allocated to them. While this may be true in some cases, it would not occur in all situations. For instance, assume the partner in the first situation described by the comment had not reported and paid tax with respect to the capital gain that was then decreased on examination. If the regulations permitted the decreased capital gain to be fully netted against the increased ordinary income, the result may lead to little or no imputed underpayment, even though the partner had not paid tax on the capital gain that was reduced. In that case, no tax was paid by the partner on the capital gain (as originally allocated to the partner) and no tax was paid by the partnership with respect to the increased ordinary income, even though the partnership had additional ordinary income that should have been allocation to the partner. While the comment stated that the netting process under proposed § 301.6225-1 eliminated situations that would benefit the taxpayer, the comment did not acknowledge that the statutory structure of section 6225 mandates this result. The comment also does not acknowledge that the netting process as enacted in the statute and implemented in the regulations also protects the IRS, for instance in cases where the partner did not pay tax on an adjusted item. During the initial phase of determining the imputed underpayment, the rules should not require the IRS to take steps to ameliorate a potential discrepancy in payment amounts based on facts applicable in one situation if the rule would result in distortions for taxpayers with different facts.

As discussed earlier in this section of this preamble, “appropriately netting” within the meaning of section 6225(b)(1)(A) means, as a general matter, that when netting partnership adjustments for purposes of determining an imputed underpayment, all limitations under the Code should be considered, including limitations that would otherwise prevent the partnership from netting certain items. Section 6225(b)(4)'s rule regarding taxpayer favorable adjustments subject to additional limitations under the Code if taken into account by any person supports this interpretation. Because certain items could be subject to limitations in the hands of certain partners, the statute requires that limitations be accounted for by assuming they exist for purposes of determining the imputed underpayment during the initial stage of the examination. The partnership may ameliorate any discrepancies caused by that assumption by demonstrating that no such limitations exist either under § 301.6225-1(d)(1) or (e)(1) or in the modification phase. The partnership can also make the election under section 6226, and the partners will account for such limitations when taking into account the adjustments.

The comment suggested specific approaches to ameliorate the concerns it raised. First, it suggested a rule that would allow an ordinary income grouping to be reduced by a capital loss grouping to the extent of $3,000 per direct or indirect individual partner. Second, it suggested a rule that would apply the applicable rate for net negative adjustments to the relevant subgrouping and allow this amount to reduce the imputed underpayment amount. Neither of these specific recommendations was adopted.

The Code permits corporate taxpayers to deduct capital losses to the extent of capital gains. Section 1211(a). In the case of taxpayers other than corporations, the Code allows a deduction for any capital loss exceeding capital gain up to $3,000 ($1,500 in the case of a married individual filing separately). Section 1211(b). A rule allowing an offset of $3,000 against an increase in ordinary income in the situations described by the comment would require the IRS to first determine that the partners in the partnership are taxpayers other than corporations such that the rules under section 1211(b) apply. While this may be a relatively simple determination in some cases, requiring the IRS to engage in making the determination contravenes the principle that partners' tax attributes, including partner identity, are generally not accounted for in the initial imputed underpayment calculation.

To the extent the rule recommended by the comment is based on the premise that each partner would be entitled to a $3,000 capital loss, that premise is faulty. One, such a rule would require the IRS to know whether there are no other capital gains (related or unrelated to the partnership) against which the non-corporate partners would first be required to offset the additional capital loss. Two, the rule would require the IRS to consider whether the partner was not an individual subject to the lower deduction amount of $1,500 allowed by section 1211(b). This process would become more burdensome as the number of partners and tiers increased. Accordingly, this comment was not adopted. To extent that this comment recommended a rule that allowed more flexibility for the IRS to group adjustments according to the facts and circumstances of the partners, that rule is reflected in proposed § 301.6225-1(d)(1) and (e)(1) as revised in the August 2018 NPRM. A partnership that wishes to request that the IRS take into account its partner's tax circumstances, including that certain partners are otherwise entitled to a capital loss deduction under section 1211(b), may utilize the discretionary grouping and subgrouping rules under § 301.6225-1(d)(1) and (e)(1) or make a modification request under § 301.6225-2(d)(6).

With respect to the recommendation that the regulations apply the applicable rate for net negative adjustments to the relevant negative subgrouping and allow this amount to reduce the imputed underpayment amount, this recommendation was also not adopted; however, the final regulations allow for the result requested by the comment depending on the facts and circumstances. The comment suggests that the rate used in determining an imputed underpayment should be applied to negative adjustments that would otherwise be adjustments that do not result in an imputed underpayment and allow those negative adjustments to net with other positive adjustments in an effort to calculate an amount that would more closely reflect what the partners would have paid if they had properly reported the adjusted items. Section 6225(b)(1) provides that the imputed underpayment is determined by appropriately netting all partnership adjustments and applying the highest rate of tax under section 1 or 11. Section 6225(b)(3) requires that the partnership adjustments are first separately determined and netted as appropriate within each category of items that are required to be taken into account separately under section 702(a) or other provision of the Code. When “appropriately netting” under section 6225(b)(1)(A), section 6225(b)(4) requires that negative adjustments that could be subject to any limitation or restriction if taken into account by any person be disregarded unless provided otherwise by regulation. The regulations incorporate this rule in § 301.6225-1(d)(3). The regulations also provide the ability, however, to take facts and circumstances into account to allow negative or downward adjustments, where appropriate, to be subgrouped and thus netted with other adjustments. See § 301.6225-1(d)(1). For these reasons, the final regulations maintain the process for subgrouping and netting as provided for in the proposed regulations.

ii. Subgrouping Principles

Before being revised in the August 2018 NPRM, former proposed § 301.6225-1(d) had provided that after grouping the adjustments, partnership adjustments are further subgrouped based on preferences, limitations, restrictions, and conventions, such as source, character, holding period, or restrictions under the Code applicable to such items. One comment stated that the proposed grouping and subgrouping rules under former proposed § 301.6225-1(d) unfairly removed many relevant distinctions between different types of items and adjustments and netted items that do not properly net against each other at the entity level, including intangible drilling costs, section 1231 gains and losses, and whether a particular partner is considered active or passive in his or her relationship to the partnership. Another comment recommended that the final regulations should also include a clear statement that the netting process will be applied in accordance with generally applicable tax law. Both comments are addressed by the amendments made by the TTCA to section 6225(b).

Section 202(a) of the TTCA added section 6225(b)(3) to provide that partnership adjustments shall first be separately determined (and netted as appropriate) within each category of items that are required to be taken into account separately under section 702(a) or other provision of the Code. Section 6225(b)(4) provides if any adjustment would (but for section 6225(b)(4)) result in a decrease in the amount of the imputed underpayment, and could be subject to any additional limitation under the provisions of the Code (or not allowed, in whole or in part, against ordinary income) if such adjustment were taken into account by any person, such adjustment shall not be taken into account when appropriately netting partnership adjustments under section 6225(b)(1)(A) except to the extent otherwise provided by the Secretary.

Former proposed § 301.6225-1(d) was revised in the August 2018 NPRM to account for the additions of sections 6225(b)(3) and (4). Proposed § 301.6225-1(d)(3)(i) provided that adjustments are subgrouped, when appropriate, according to how the adjustment would be required to be taken into account separately under section 702(a) or any other provision of the Code or regulations applicable to the adjusted partnership-related item. By separating adjustments into subgroupings according to how and whether the adjustments would be separately stated pursuant to section 702(a), the rules under § 301.6225-1(d)(3)(i) ensure that items that do not properly net against each other at the partnership level under section 702(a) do not net against each other for purposes of determining an imputed underpayment.

For example, under § 301.6225-1(c) a positive adjustment to intangible drilling costs and a negative adjustment to gain or loss from a sale of property described in section 1231 are both placed in the residual grouping. Pursuant to § 301.6225-1(d)(3)(i), each adjustment is then placed in a separate subgrouping to reflect that one adjustment is a negative adjustment and that the items being adjusted are required to be separately stated pursuant to section 702(a). See section 702(a)(3), § 1.702-1(a)(8)(i). Under § 301.6225-1(e)(1), adjustments from separate subgroupings cannot be offset against one another. Accordingly, just as a positive amount of intangible drilling costs would not be netted with a section 1231 loss under section 702(a), a positive adjustment to intangible drilling costs would not net against a negative adjustment to 1231 gain or loss for purposes of determining an imputed underpayment.

Some items that are not separately stated pursuant to section 702(a) may nevertheless be subject to other limitations under the Code or may not otherwise be allowed to net against ordinary income. To account for those types of limitations, proposed § 301.6225-1(d)(3)(i) further provided that if any adjustment could be subject to any preference, limitation, or restriction under the Code (or not allowed, in whole or in part, against ordinary income) if taken into account by any person, the adjustment is placed in its own separate subgrouping. For example, an increase in loss attributable to a trade or business activity of the partnership may not be deductible in the hands of a particular partner because that partner did not materially participate in the partnership activity. See section 469. Because the loss may be limited in the hands of a particular partner, the increase in loss is placed in its own separate subgrouping to prevent any inappropriate netting against an adjustment increasing income of the partnership.

Accordingly, both the comment expressing concerns about the netting of items that do not properly net against each other at the entity level and the comment suggesting the regulations apply general principles of tax law were addressed by the changes to section 6225 in the TTCA and the subgrouping rules under § 301.6225-1(d)(3)(i) as revised in the August 2018 NPRM. As a result, the final regulations were not revised in response to these comments.

Generally, under § 301.6225-1(d), reallocation adjustments must be placed into their own subgroupings, but there is an exception for when multiple reallocation adjustments apply to a single partner or group of partners. Proposed § 301.6225-1(d)(3)(ii) provided that if a particular partner or group of partners has two or more reallocation adjustments allocable to such partner or group, such adjustments may be subgrouped in accordance with § 301.6225-1(d)(3)(i) and netted in accordance with § 301.6225-1(e). Proposed § 301.6225-1(d)(3)(iv) provided a similar rule with respect to recharacterization adjustments.

In January 2017, a prior version of the June 2017 NPRM was made publicly available but was not published in the Federal Register. The unpublished version of the June 2017 NPRM contained an example under former proposed § 301.6225-1(f) (former Example 3) which was not contained in the June 2017 NPRM that was published in the Federal Register. One comment recommended that former Example 3 be added back to the regulations. This comment was not adopted. The Treasury Department and the IRS considered reviving former Example 3, but because of the changes to section 6225 in the TTCA, former Example 3 did not comport with the statute or the proposed regulations. Instead of reviving former Example 3, a new example was added, Example 12, to clarify subgrouping principles in the case of facts similar to, but slightly different from, the facts in former Example 3.

One comment recommended that the regulations clarify whether and under what conditions positive and negative adjustments resulting from different reallocation or recharacterization adjustments are permissibly placed in the same subgrouping. The comment stated that the language of both proposed § 301.6225-1(d)(3)(ii) and (iv) seemed to allow the inclusion in the same subgrouping of unrelated positive and negative adjustments provided that all of the adjustments apply to a particular partner or group of partners. The comment suggested that the final regulations include examples clarifying the proper grouping and netting of adjustments pursuant to § 301.6225-1(d)(3). The addition of Example 12 under § 301.6225-1(h) provides the example suggested by the comment. As discussed earlier in this section of this preamble, Example 12 clarifies operation of the rule under § 301.6225-1(d)(3)(ii) allowing for adjustments to be subgrouped together when the adjustments are allocable to a particular partner or group of partners. Although Example 12 illustrates these concepts in the context of reallocation adjustments, the example's analysis is equally applicable to recharacterization adjustments. The result demonstrated by Example 12 under § 301.6225-1(h) of the rule under § 301.6225-1(d)(3)(ii) for reallocation adjustment subgroupings would not be the result if the negative adjustments in that example were subject to limitations described in section 6225(b)(4) and § 301.6225-1(d)(3)(i).

iii. Negative Adjustments

Under § 301.6225-1(e), adjustments from each subgrouping (or grouping if there is no subgrouping within that grouping) are netted to produce either a net positive adjustment or a net negative adjustment with respect to each grouping or subgrouping. When determining an imputed underpayment, generally only net positive adjustments are taken into account, and net negative adjustments are generally treated as adjustments that do not result in an imputed underpayment. Adjustments to credits and creditable expenditures are treated separately. See section 3.A.vi. of this preamble.

One comment suggested that the requirement that only net positive adjustments are taken into account in determining an imputed underpayment will frequently result in double taxation of the same income items. The comment cited to Example 4 under proposed § 301.6225-1(h) (Example 3 in former proposed § 301.6225-1(f)) to demonstrate this point. In Example 4, the IRS determines that $125 of long-term capital gain should have been reported as $125 of ordinary income, resulting in a $125 increase in ordinary income and a corresponding $125 decrease in long-term capital gain (a $125 increase in long-term capital loss). The increase in ordinary income results in an imputed underpayment, and the increase in long-term capital loss is an adjustment that does not result in an imputed underpayment.

To the extent the comment was suggesting that the example does not specify what happens with respect to the $125 increase in long-term capital loss, the example was revised in the August 2018 NPRM to clarify that this loss is taken into account in accordance with § 301.6225-3. Under § 301.6225-3(b), the partnership takes into account the adjustment increasing long-term capital loss in the adjustment year. Alternatively, the partnership may request modification under section 6225(c) or make a push out election under section 6226 to ensure that the negative adjustment is taken into account by the partnership's reviewed year partners, rather than in the adjustment year by its adjustment year partners.

To the extent the comment was expressing more general concerns about double taxation, proposed § 301.6225-1(b)(4) was added in the August 2018 NPRM to provide that if the effect of a partnership adjustment under chapter 1 of the Code is reflected in another adjustment taken into account in the imputed underpayment determination, the IRS may treat an adjustment as zero for the purposes of calculating the imputed underpayment. This rule is designed to ensure that when calculating an imputed underpayment, an adjustment is not counted twice if the tax effect of that adjustment is reflected by another adjustment made by the IRS. A partnership may request that the IRS utilize this rule to treat an adjustment as zero if there is the partnership is concerned about double taxation. Accordingly, to the extent the comment was raising concerns about double taxation, no changes were made to the regulations in response to the comment.

The final regulations under § 301.6225-1(b)(4) do, however, clarify that the IRS has the discretion to treat adjustments as zero for purposes of determining the imputed underpayment if the effect of the adjustment under the Code is reflected in another adjustment. The language requiring that the adjustment must have previously been taken into account under § 301.6225-1 was removed. This change provides the IRS the discretion to treat a partnership adjustment as zero in more situations. For instance, the effect of an adjustment may be reflected in an adjustment to an item treated inconsistently under section 6222(c). The final regulations under § 301.6225-1(b)(4) also remove the language limiting the rule's application to chapter 1. Under the final regulations, the rule applies to the effect of an adjustment under the Code in general. This change also gives more flexibility to the IRS to treat partnership adjustments as zero for purposes of determining the imputed underpayment amount.

iv. Other Suggestions Regarding Grouping and Netting Adjustments

One comment suggested that its concerns with the grouping and netting rules might be alleviated by allowing the partnership to treat the partnership adjustment as if it arose during the adjustment year rather than the reviewed year, which would synchronize the imposition of the tax in the adjustment year with the adjustment year partners bearing the liability for the imputed underpayment. This comment was not adopted because it is contrary to the plain language of the statute.

Section 6225(a)(1) refers to adjustments to partnership-related items “with respect to any reviewed year.” Section 6225(b)(1) provides that any imputed underpayment “with respect to any reviewed year” shall be determined by appropriately netting all partnership adjustments “with respect to such reviewed year.” In addition, section 6225(d)(2) defines adjustment year to mean, in the case of an examination, the year in which an FPA is mailed under section 6231 or in the case of adjustment pursuant to a decision in a proceeding under section 6234, the year in which the decision is final. Accordingly, at the time of the modification phase of the examination, the adjustment year will not yet be determined.

If the comment's suggestion were adopted and adjustments were treated as having arisen in the adjustment year, it is unclear whether the reviewed year partners' or the adjustment year partners' tax attributes would be relevant in the modification determination. The modification period will in every case come before the issuance of the FPA. As a result, the adjustment year will not yet have been determined, and therefore the adjustment year partners will not yet be known. In addition, section 6225(c)(2) provides the ability for partners to file amended returns in modification. The statute's use of the phrase “amended return” implies that a prior return must have been filed. A prior return could not have been filed for the adjustment year at this point in the examination because the adjustment year would not yet be determined. The partners from the reviewed year, therefore, must be the partners that utilize the modification procedures under section 6225(c)(2) through the filing of amended returns for the reviewed year. The reviewed year partners' amended returns could not take into account adjustment year adjustments and apply them against reviewed year returns. Accordingly, the plain language of the statute indicates that adjustments for purposes of determining an imputed underpayment are the adjustments with respect to a reviewed year, not the adjustment year.

Furthermore, section 6225(a)(1) provides the partnership shall pay an amount equal to such imputed underpayment in the adjustment year as provided in section 6232. In the case of adjustments that do not result in an imputed underpayment, section 6225(a)(2) provides that such adjustments shall be taken into account in the adjustment year. Section 6225(a)(2)'s explicit statement that adjustments not resulting in an imputed underpayment are taken into account in the adjustment year, and the absence of similar language in section 6225(a)(1) makes clear that only those partnership adjustments that do not result in an imputed underpayment are taken into account in the adjustment year.

Accordingly, a reasonable reading of the statutory language of section 6225(a) supports an interpretation that adjustments with respect to the reviewed year should be treated as such for purposes of determining an imputed underpayment and not treated as adjustments arising in the adjustment year. However, § 301.6225-3 does provide that adjustments that do not result in an imputed underpayment are taken into account in the adjustment year, that is, when the imputed underpayment is also required to be paid. To that extent, any adjustments that do not result in an imputed underpayment may mitigate the burden of the imputed underpayment on adjustment year partners.

Another comment stated that the time shifting of the tax on partnership examination adjustments from the reviewed year to the adjustment year is inappropriate and that tax on partnership examination adjustments should arise in the reviewed year and not in the adjustment year. The comment further states that the burden of the payment in all cases should fall directly on the reviewed year partners and that the rules should require the reviewed year partners to amend their reviewed year tax returns to include their shares of the partnership examination adjustments. The comment was not adopted because all of the changes recommended by the comment would require amendments to the statute.

Section 6225 provides that if the adjustments result in an imputed underpayment, the partnership shall pay an amount equal to such imputed underpayment in the adjustment year as provided in section 6232. Accordingly, the year partnerships must pay is, by statute, the adjustment year, and if the partnership pays the imputed underpayment without modification or does not make an election under section 6226, the statute is designed so that the adjustment year partners bear the burden of that payment. See section 6241(4) and § 301.6241-4 (denying any deduction to the partnership for any payment made by the partnership, including the imputed underpayment). Additionally, there is no authority within subchapter C of chapter 63 to allow the Treasury Department or the IRS to require that reviewed year partners file amended returns, though partners have the option to do so in modification. The partnership may also make the election under section 6226 which would result in adjustments relating to the imputed underpayment for which the election was made being taken into account by the reviewed year partners.

Another comment suggested treating an audited partnership as an “entity” rather than an “aggregate” solely for the purposes of calculating the imputed underpayment based on majority ownership of the partnership (measured by the partners' interest in profits). Specifically, the comment suggested that if more than 50% of the interest in a partnership's profit is held by one or more individuals, S corporations, or closely-held corporations, the provisions of the Code that apply to individuals should apply for purposes of determining the amount of any imputed underpayment. This comment was not adopted.

As discussed earlier in this section of this preamble, section 6225 is prescriptive as to how an imputed underpayment is determined. The determination process expressly does not determine the imputed underpayment as if the partnership were an individual or an entity. Instead, the process for determining the imputed underpayment, including “appropriately netting all partnership adjustments” under section 6225(b)(1)(A) in accordance with § 301.6225-1 generally does not take into account partner tax attributes, including whether a partner is an individual or a person subject to the Code provisions that apply to individuals. The IRS has the discretion to take into account an attribute of a particular partner when grouping or subgrouping the adjustments, but the IRS is not required to do so. § 301.6225-1(d)(1), (e)(1). For instance, the IRS may consider whether a certain ownership percentage of the partnership was held by individuals, S corporations, or closely-held corporations and group adjustments based on information submitted by the partnership. However, a rule requiring the IRS to treat all partnership adjustments as if they were being taken into account by an individual as the comment suggests is inconsistent with the statutory requirement to net items appropriately. A rule that required the IRS to do so would also potentially disadvantage certain partnerships depending on the nature of adjustments and the types of the partners.

Moreover, it is not clear that the comment's suggestion of accounting for the individual tax attributes of specific partners and applying the Code's rules regarding those partners would yield an appropriate netting of the adjustments for purposes of determining the imputed underpayment at the partnership level. For example, the Code's rules may apply differently to one individual partner versus another individual partner. Treating all individual partners in the same manner would negate operation of those rules. Accordingly, there is no reason to conclude that treating adjustments according to how some but not all partners' tax attributes would affect an adjustment is any more reasonable than not taking into account any partners' tax attributes. The statute provides a baseline assumption that partners' tax attributes are not taken into account. The imputed underpayment that best reflects the facts and circumstances of the partners should be determined through application of the permissive grouping and subgrouping rules under § 301.6225-1(d)(1), (e)(1) or through modification. Accordingly, the final regulations do not adopt the comment's suggestion to base the imputed underpayment determination on the identity of the majority of the partnership.

Section 6225(b) only provides specific rules with respect to one type of adjustment, that is, the rule that adjustments to distributive shares of partners not be netted under section 6225(b)(2). While it is true a determination regarding an adjustment described in section 6225(b)(2) is usually made with some knowledge of the partners' distributive shares, such a determination does not account for the particular tax attributes of any specific partner. The IRS is not required to know any other information about the specific partners at the initial examination phase to reallocate adjustments between partners. Therefore, in order to effectuate the rule under section 6225(b)(2), there is no need to know whether a partner is an individual, a corporation, a pass-thru partner, or some other entity. Section 6225(b)'s lack of reference to any particular tax attributes of specific partners indicates that the determination of an imputed underpayment is not dependent on knowing any partner's specific tax attributes.

The same comment suggested another alternative in which the grouping and netting rules would account for current year partner attributes for purposes of determining an imputed underpayment. The comment cited the amendment to section 6225(a) by TTCA that provides if the partnership adjustments do not result in an imputed underpayment, such adjustments shall be taken into account by the partnership in the adjustment year. This comment was not adopted.

Section 6225 does not reference either partner tax attributes or current year partners as a consideration in determining the imputed underpayment. As discussed earlier in this section of this preamble, the Treasury Department and the IRS have determined a reasonable interpretation of section 6225(b) supports a process in which the determination of the imputed underpayment does not depend on specific partners' tax attributes. Moreover, the comment's reference to “current year” is ambiguous; it could refer to any number of different time periods: the adjustment year, the actual calendar year in which the imputed underpayment is being determined, the year the imputed underpayment is proposed in a notice of proposed partnership adjustment, the time during the modification period prior to issuance of the FPA, or, if the partnership contests the partnership adjustments in court, the year the court decision is final. It is not administrable for the IRS to determine an imputed underpayment based on the potential tax attributes from time periods that are not fixed relative to the reviewed year and that may result in different partners being the relevant partners. The final regulations reflect the amendments to section 6225 by the TTCA, and therefore the final regulations were not revised in response to this comment.

v. Recharacterization Adjustments

One comment recommended that the grouping and subgrouping rules be reconsidered due to the concern that under the proposed regulations, the inability to net certain overpayments and underpayments could lead to taxpayers not receiving an appropriate adjustment for taxes previously paid. The comment cited to Example 4 under proposed § 301.6225-1(h) to highlight this concern. In Example 4, the IRS determines that $125 of long-term capital gain should have been reported as $125 of ordinary income, resulting in a $125 increase in ordinary income and a corresponding $125 decrease in long-term capital gain (effectively, a $125 increase in long-term capital loss). The increase in ordinary income results in an imputed underpayment, and the increase in long-term capital loss is an adjustment that does not result in an imputed underpayment.

The comment noted that the example does not specify what happens with respect to the $125 increase in long-term capital loss. As discussed earlier in section 3.A.iii. of this preamble, the example has been revised to clarify that $125 increase in long-term capital loss is taken into account in the adjustment year in accordance with § 301.6225-3. The comment also noted that it is unknown whether the partnership will be able to use the increased capital loss in the future. To avoid this potential adverse consequence, the comment recommended that the regulations permit a partnership to net adjustments across different categories of gain or loss to reflect taxes that were previously paid. This comment was not adopted for several reasons.

As an initial matter, implicit in the comment's suggestion is that either the IRS or the partnership have knowledge of taxes previously paid by the partners. As discussed earlier in section 3.A.i. of the preamble, facts and circumstances unique to specific partners are generally not taken into account in determining whether the adjustments result in an imputed underpayment. The regulations give the IRS wide latitude to consider such facts and circumstances, but the rules do not narrowly define the circumstances when that occurs. See § 301.6225-1(d)(1) and (e)(1). The regulations are designed to maintain flexibility for both the IRS and the partnership to allow for the particular examination to accommodate the unique circumstances of each examination. Based on these reasons alone, the comment's suggestion was not adopted.

The comment's suggestion was also not adopted because it is inconsistent with the overall approach applied to how recharacterization adjustments are taken into account in determining an imputed underpayment. Proposed § 301.6225-1(c)(6)(iii) provided that a recharacterization adjustment results in at least two separate adjustments: One adjustment reversing the improper characterization of the partnership-related item, and the other adjustment effectuating the proper characterization of the partnership-related item. Generally, one of those adjustments is a positive adjustment and the other is a negative adjustment, but each adjustment is normally the same numerical amount ($125 in the case of Example 4 under proposed § 301.6225-1(h)). Under proposed § 301.6225-1(d)(3)(iv), the positive adjustment and the negative adjustment are each placed into its own separate subgrouping. Because an adjustment in one subgrouping may not be netted against an adjustment from another subgrouping, the positive adjustment is not offset by the negative adjustment, and the result is a net positive adjustment that forms the base for an imputed underpayment amount. Proposed § 301.6225-1(e)(2) and (3)(i).

These rules are adopted largely without change in the final regulations in order to ensure that recharacterization adjustments are not inappropriately netted when determining an imputed underpayment, as required by section 6225(b)(1)(A). Allowing for the netting of the negative adjustment against the positive adjustment in the case of a recharacterization adjustment, as suggested by the comment, could cause the positive adjustment to be negated in its entirety, which would defeat the purpose of making the adjustment in the first place. It would also result in the recharacterization adjustment not properly being reflected in the imputed underpayment calculation. For instance, allowing the capital loss to fully offset the ordinary income in Example 3 under § 301.6225-1(h) would not adequately reflect the fact that there was an underreporting of ordinary income by the partnership for that taxable year. Furthermore, if there were no imputed underpayment because recharacterization adjustments were allowed to net, there would be no statutory basis for imposing an interest charge on the partnership as suggested by the comment.

Accordingly, the comment's suggestion to net adjustments across different categories of gain or loss to reflect taxes that were previously paid was not adopted, though the effect of such adjustments may be mitigated, in whole or in part, under certain circumstances through the modification procedures or by making a push out election under section 6226. The final regulations under § 301.6225-1(e)(2) do clarify, however, that positive adjustments and negative adjustments within the same subgrouping may only net within that same subgrouping. No netting is permitted across subgroupings.

vi. Credits and Creditable Expenditures

In determining whether partnership adjustments result in an imputed underpayment, adjustments to credits are placed in the credit grouping described under § 301.6225-1(c)(3). One comment suggested that for administrative efficiency, it would make sense to group and order credits in accordance with Form 3800 and recommended that the regulations provide for grouping and ordering credits in such a manner. This comment was not adopted.

As discussed earlier in section 3.A.ii. of this preamble, the subgrouping rules under § 301.6225-1(d)(3)(i), including the application of those rules to the credit grouping, take into account any limitations or restrictions under the Code. Therefore, to the degree the Code would require certain credits to be subgrouped within the credit grouping to reflect any limitations or restrictions, the rules under § 301.6225-1(d)(3)(i) allow for that result. In addition, when determining subgroupings the IRS may take into account the facts and circumstances of a partnership and its partners. It may be the case that the subgroupings with respect to a particular set of adjustments ultimately reflects the manner in which credits are grouped and ordered on Form 3800, but that may not always be the case. The regulations provide the necessary flexibility to achieve the result suggested by the comment without binding the IRS and partnerships to a particular manner in which credits must be subgrouped.

Additionally, because the Form 3800 and the underlying statutory rules it reflects may change over time, it is unwise to link the regulatory rules for subgrouping with the form's methodology for grouping credits. Relying on the general subgrouping rules under § 301.6225-1(d)(3)(i) gives the IRS and partnerships the flexibility to adapt to changes in the Code and any form changes without needing to amend the regulations.

Adjustments to creditable expenditures are placed in the creditable expenditure grouping described under § 301.6225-1(c)(4). Proposed § 301.6225-1(c)(4)(B), (d)(3)(iii), and (e)(3)(iii) provided specific rules relating to foreign creditable tax expenditures. Aside from the general rule regarding what constitutes a creditable expenditure, no additional rules relating to creditable expenditures were proposed.

The Treasury Department and the IRS requested comments on the appropriate treatment of creditable expenditures. One comment suggested any items that may be treated as a credit when taken into account by a partner and not otherwise limited (for instance, by their non-creditable status against the alternative minimum tax) be credited against the imputed underpayment amount. For other items which may be subject to limitations at the individual level, the comment suggested that the regulations provide rules similar to those rules proposed under proposed § 301.6225-3, regarding adjustments that do not result in an imputed underpayment, because any adjustment to a credit would not result in an imputed underpayment.

With the exception of the rules under § 301.6225-1 regarding foreign tax creditable expenditures, the Treasury Department and the IRS have determined not to issue regulations regarding the treatment of creditable expenditures at this time. However, the final regulations do clarify that the general subgrouping principles under § 301.6225-1(d)(3)(i) apply when subgrouping adjustments to creditable expenditures. The comments received with respect to creditable expenditures remain under consideration, and future guidance will be issued when appropriate. The final regulations also clarify that a net positive adjustment to creditable foreign tax expenditures is excluded from the calculation of the total netted partnership adjustment under § 301.6225-1(b)(2).

Comments were also requested regarding how credit recapture situations should work under the centralized partnership audit regime. One comment offered suggestions with respect to two credit recapture situations. The first situation involved a credit recapture that results from a partnership adjustment. The comment recommended in that situation that the regulations should incorporate any credit recapture into the calculation of any imputed underpayment to the extent that the originating credits were generated from partnership activities, but that this incorporation should be limited to partnerships with partners that actually would have benefited from the original credits. This recommendation was partially adopted.

A recapture of a credit generated by partnership activities constitutes a partnership adjustment as defined under § 301.6241-1(a)(6), and the credit recapture would constitute a positive adjustment under § 301.6225-1(d)(2)(iii)(A) and be placed in the credit grouping under § 301.6225-1(c)(3). The full amount of the credit recapture would be taken into account in the determination of the imputed underpayment, unless the partnership requests, subject to IRS approval, that the credit recapture should be taken into account differently during the partnership-level proceeding or pursuant to a modification request. See § 301.6225-1(d)(1), (e)(1), § 301.6225-2. This rule is necessary because, as discussed earlier in this section of this preamble, in general, the initial determination of an imputed underpayment does not account for the attributes of the partnership's partners, including whether and to what extent any partners actually benefited from the original credits. Accordingly, the final regulations include a credit recapture amount in the amount of the imputed underpayment, and this amount is not limited to the amount partners actually benefited from the recaptured credits unless the partnership can affirmatively demonstrate to the satisfaction of the IRS during exam either before issuance of the NOPPA or on modification the appropriate partner-level tax treatment.

The second situation described by the comment involves a partnership adjustment that results in a credit that is incorporated into the imputed underpayment calculation, presumably as a reduction to the imputed underpayment and that may later be subject to recapture. The comment recommended that the regulations require the partnership to notify partners that they received the benefit of such credits and that the partners may be obligated to recapture those credits at a later date. The comment suggested this notice could be provided as notes to the adjustment year Schedule K-1. This comment was not adopted. The final regulations do not require that the partnership notify the partners of any risk of future credit recapture, though the partnership is not prohibited from doing so if the partnership determines that such notification would be beneficial to the partners and the partnership. Except where required for the operation of the provisions of the centralized partnership audit regime, the Treasury Department and the IRS do not generally regulate communications between the partnership and the partners, and therefore the final regulations do not impose a requirement for notification by the partnership concerning possible credit recaptures.

Because a net negative adjustment to a credit, that is, an increase in an item of credit, would generally be subject to limitations under the Code, the final regulations under § 301.6225-1(e)(3)(ii) clarify that a net negative adjustment to a credit is treated as an adjustment that does not result in an imputed underpayment as described in § 301.6225-1(f)(1), unless the IRS determines otherwise. This rule ensures that the total netted partnership adjustment is not inappropriately reduced by an increase in credit that would subject to limitations in the hands of the partners of the partnership.

B. Modification of an Imputed Underpayment

Proposed § 301.6225-2 provided the rules and procedures regarding modification of an imputed underpayment by the partnership. The Treasury Department and the IRS received multiple comments regarding proposed § 301.6225-2 focusing on the following areas: (1) Modification in general; (2) timing of modification requests and determinations; (3) amended return modification; (4) the alternative procedure to filing amended returns; (5) rate modification; (6) modification pertaining to certain passive losses of publicly traded partnerships; (7) modification pertaining to qualified investment entities; (8) closing agreement modification; and (9) recommendations to add additional types of modifications.

i. Comments Pertaining to Modification in General

The modification provisions under § 301.6225-2 are designed to determine an imputed underpayment amount that reflects, as closely as possible, the tax the partners would have paid had they correctly reported the adjusted items, while at the same time maintaining the efficiencies of a streamlined examination and collection process. See JCS-1-16 at 65-66. One comment suggested, that the modification provisions do not operate as intended because those provisions do not expressly permit a modification to reflect how the partners actually took an item into account, to account for reductions that would be permitted to offset an increase under generally applicable law, or to otherwise expressly challenge the IRS's method of calculating a proposed adjustment amount. Except as described later in this section, no changes to the regulations were made in response to this comment.

The Treasury Department and the IRS do not agree with the comment's characterization of how the modification provisions operate because the modifications available under § 301.6225-2 permit a partnership to achieve the results sought by the comment. For instance, both the amended return procedure and the alternative procedure to filing amended returns provide an opportunity for the partnership to request modification to reflect how an item was actually taken into account by its partners and to account for offsetting reductions permitted under generally applicable law. When a partner files an amended return including his share of the partnership adjustments, the amended return reflects a tax amount based on how the partner originally reported the partnership-related item prior to adjustment compared to how the partnership adjustment affects the partner's original return. This tax amount is the correct amount of tax for that partner after taking into account the partnership adjustment and includes any allowable reductions that may offset any additional income determined at the partnership level.

Regarding the comment's concern that a partnership does not have an opportunity to challenge the IRS's method of calculating a proposed adjustment amount, proposed § 301.6225-2(d)(6) provided a procedure for modifying the composition of an imputed underpayment. Under § 301.6225-2(d)(6), a partnership may request that the IRS include one or more partnership adjustments in a particular grouping or subgrouping. If certain negative partnership adjustments should be treated as if no limitations or restrictions in fact apply to the partners to whom the adjustments are allocated and the partnership can establish this result, if approved, on modification, such negative adjustments may be properly grouped or subgrouped with other adjustments and therefore allowed to net against those adjustments in accordance with § 301.6225-1(e) to reduce the amount of the imputed underpayment.

To the extent the comment was suggesting that the modification procedures do not provide the partnership an opportunity to challenge the substance of partnership adjustments, the comment is correct but no change is made in response to the comment. The statutory modification procedures are designed to allow the partnership to modify the amount of the imputed underpayment, not adjust the substance of the partnership adjustments that underlie the imputed underpayment. The substance of partnership adjustments are determined by the IRS on examination, and may be further revised in the IRS Appeals Office (IRS Appeals) or by a court in a proceeding for readjustment brought under section 6234. Although the comment did not explicitly state it as such, to the extent the comment was recommending a rule under § 301.6225-2 that allows a modification to reflect a circumstance where a partner actually took an item into account in a manner consistent with how that item was adjusted by the IRS during the partnership proceeding, this suggestion was adopted. As discussed later in section 3.B.ix. of this preamble, the final regulations under § 301.6225-2(d)(2)(ii) allow a partnership to request modification based on how adjusted items were taken into account by a partner prior to the item being adjusted by the IRS.

The same comment also suggested that the modification procedures permit a partnership to demonstrate how an adjustment would impact its partners and reduce an imputed underpayment without a need for the partners to file an amended return. The other proposed modification procedures provided multiple opportunities for partnerships to demonstrate the impact of adjustments on specific partners. The alternative procedure to filing amended returns is one way in which this type of modification may be achieved. Under § 301.6225-2(d)(2)(x), a partnership may submit on behalf of a partner, in accordance with forms, instructions, and other guidance prescribed by the IRS, all information and payment of any tax, penalties, additions to tax, additional amounts, and interest that would be required to be provided if the partner were filing an amended return. If the partnership avails itself of this procedure with respect to a partner, the partner does not need to also file an amended return in order for modification to be approved. The amended return procedures and the alternative procedure to filing amended returns are discussed further in sections 3.B.iii. and 3.B.iv. of this preamble.

Other modification procedures also provide the partnership with an opportunity to demonstrate the effect of adjustments on specific partners. For instance, tax-exempt modification provides an opportunity for the partnership to demonstrate that partnership adjustments are allocable to a partner that would not owe tax by reason of its status as a tax-exempt entity. Rate modification allows partnerships to demonstrate that partners would be subject to a lower rate than the highest rate of tax applied to calculate the imputed underpayment. Because the partnership has many avenues within modification to demonstrate the effect a partnership adjustment would have on specific partners, no new modification procedures were adopted in response to this comment.

Former proposed § 301.6225-2 permitted a partnership to request modification with respect to an indirect partner (as defined in § 301.6241-1(a)(4)). See, for example, former proposed § 301.6225-2(d)(2). One comment suggested that permitting partnerships to modify their imputed underpayment to account for direct and indirect partners is consistent with the objective of determining an imputed underpayment amount that is as close as possible to the tax due if the partnership and partners had correctly reported and paid. The comment further suggested that permitting modifications for direct and indirect partners would also reduce the disincentives for partnerships to pay the imputed underpayment and recommended the final regulations adopt rules permitting modification with respect to indirect partners, consistent with the proposed regulations.

The final regulations are consistent with the comment's request and adopt the proposed rules allowing modification with respect to indirect partners, provided the indirect partner is a relevant partner as defined in § 301.6225-2(a). The August 2018 NPRM introduced, the term “relevant partner” to describe any person for whom modification is requested by the partnership that is a reviewed year partner, including a pass-through partner, or an indirect partner. The term relevant partner does not include, however, any person that is a wholly-owned entity disregarded as separate from its owner for Federal income tax purposes. No comments were received regarding the definition of relevant partner. The final regulations maintain the definition of relevant partner from proposed § 301.6225-2(a).

Accordingly, under the final regulations a partnership may request modification with respect to reviewed year partners (direct partners), including pass-through partners, and indirect partners. A partnership may not request modification, however, with respect to a direct or indirect partner that is a wholly-owned entity disregarded as separate from its owner for Federal income tax purposes.

One comment noted some concerns regarding the interaction between the centralized partnership audit regime and ERISA. The comment expressed concerns about situations in which the partnership representative must decide whether to request a modification that benefits non-ERISA partners over ERISA partners and how that affects the discharge of any fiduciary duties under ERISA. To address these concerns, the comment made three recommendations. First, the comment recommended that the regulations provide that the partnership representative may solicit a vote of the partners in the partnership in determining whether to request a modification. This recommendation was not adopted.

The decision whether to solicit a vote of the partners in the partnership as part of determining whether to request modification or a particular type of modification is fully within the authority of the partnership representative. Nothing in the final regulations prevents or requires the solicitation of a vote by the partnership representative. Additionally, if the partnership and its partners impose such a condition on the partnership representative through an agreement with the partnership representative, any failure to adhere to that agreement does not affect actions taken by the partnership representative. See § 301.6223-2(d).

Second, the comment recommended that the IRS agree to automatically grant a request for an extension of the 270-day period for requesting modification if a vote of the partners whether to request modification has been solicited. This comment was not adopted for the reasons discussed in section 3.B.ii. of this preamble.

Lastly, the comment recommended that the Treasury Department and the IRS share a suggestion with the Department of Labor that the Department of Labor clarify that a partnership representative will not be treated as a fiduciary with respect to any ERISA plan partner if the partnership representative requests or fails to request a modification based on the results of a vote of the partners. The rules regarding who is treated as a fiduciary with respect to any ERISA plan are beyond the scope of these regulations. However, as requested, the comment has been forwarded to the Department of Labor.

Another comment recommended that the IRS revise proposed § 301.6225-2(c)(2)(ii) to limit the required information submitted with any modification request to that specific information relevant to the type of modification requested. The comment noted that requiring extensive and detailed documentation for each modification request will limit the ability of some partnerships to take advantage of the modification procedure. The comment also urged the IRS to establish realistic minimal documentation requirements for any modification request and create additional specific relevant requirements for the various types of modification requests permitted under the proposed regulations. The comment further noted that the ability of the IRS to request supplemental information prior to approval (as provided in proposed § 301.6225-2(c)(4)) will ensure that the IRS obtains documentation they deem necessary for a particular set of facts and circumstances. This comment was adopted.

The final regulations under § 301.6225-2(c)(2)(ii) clarify that the partnership representative must furnish to the IRS information as required by forms, instructions, or other guidance prescribed by the IRS or as is otherwise requested by the IRS. The final regulations provide examples of such information, including the information that was described previously in proposed § 301.6225-2(c)(ii). The information listed in the proposed regulations pertained to items that are necessary to process the majority of modification requests. It is possible, however, that certain items may not be necessary in every case, and if such items are not necessary, or if different items are more appropriate, the IRS will describe the information required in forms, instructions, or other guidance. In this way, the regulations provide the flexibility for the IRS to request what is needed for efficient and effective processing of modification requests, while maintaining the flexibility to adapt information requests in the future.

The final regulations under § 301.6225-2(c)(2)(i) also clarify that, pursuant to section 6241(10), the partnership may be required to submit or file items required to be provided to the IRS under § 301.6225-2 in an electronic format. The form and manner for submission of anything required to be submitted under § 301.6225-2 will be described in forms, instructions, and other guidance prescribed by the IRS. Lastly, the final regulations under § 301.6225-2(c)(2)(i) clarify that the IRS will deny modification not only for the failure to substantiate a modification request but also for the failure to pay anything required under § 301.6225-2.

ii. Timing of Modification

Proposed § 301.6225-2(c)(3) provided rules regarding the time for submitting modification information to the IRS. One comment made three recommendations regarding these rules. First, the comment suggested that the final regulations provide a specified time frame in which the IRS must respond to a request for modification. This suggestion was not adopted because the regulations under section 6235 provide a time frame within which the IRS will respond to a partnership's modification request.

Pursuant to § 301.6235-1(a)(2) and (b), in the case of any modification of an imputed underpayment, no partnership adjustment may be made later than the date that is 270 days after the date on which everything required to be submitted under § 301.6225-2 for modification is so submitted. The date on which everything required to be submitted is so submitted is the date the modification period ends or expires. § 301.6235-1(b)(2). Accordingly, in the case of a modification request, the IRS must generally mail an FPA to make a partnership adjustment within 270 days of the date the modification period ends.

To the extent the comment was requesting a deadline by which the IRS must respond to a request for modification prior to the time limit for making adjustments under section 6235, the comment was not adopted. It is not administrable for the IRS to impose a deadline that would apply in every case that is earlier than the statutory deadline imposed by section 6235. The facts and circumstances of each administrative proceeding, the partnership adjustments made during that proceeding, and the modifications that are requested may differ greatly. Similarly, the complexity of the modification process may range from simple and straight forward to highly complex. Finally, for those modification requests that are more complex or that require additional documentation, the partnership may extend the time period for submitting modifications under § 301.6225-2(c)(3) to allow for additional time and any additional documentation. For the reasons discussed in section 3.B.iii. of this preamble, the IRS plans to adopt procedures under which the IRS will respond to a request for modification in the FPA, including the planned time frame for responses. It is important to tax administration that these procedures are developed in separate guidance to allow for additional flexibility as the IRS gains more experience with the centralized partnership audit regime and the modification process. The 270-day period for mailing an FPA therefore acts as the outside time frame within which the IRS must respond to a request for modification. Because this time frame exists elsewhere in the regulations, the final regulations under § 301.6225-2 do not provide a separate time frame for providing a response to a modification request.

The comment also recommended that the final regulations provide that if there is a pending request for modification at the expiration of the 270-day period, the IRS will automatically agree to an extension of that period until at least 30 days after they provide their response. It is not clear from the face of the comment which 270-day period the comment was referring to—the 270-day period under § 301.6225-2(c)(3)(i) in which everything required for modification must be submitted or the 270-day period under § 301.6235-1(b) in which the IRS must mail an FPA to make a partnership adjustment. Both periods may be extended at the request of the partnership or the IRS. See §§ 301.6225-2(c)(3)(ii); 301.6235-1(d).

Regardless of which 270-day period the comment was referring to, the comment was not adopted. The final regulations do not provide that the IRS will automatically agree to an extension of either period under any circumstance. Whether an extension of the time to submit modification information, or an extension of the time to consider such information, is warranted is based on the facts and circumstances. In some cases an extension may be appropriate, for example, where there is a pending request and additional information would help clarify the issues. In other cases an extension may not be appropriate, for example, where it is clear that more information is likely to be of little to no value. Accordingly, while the regulations allow for an extension of both the period to submit modification information and the period in which the IRS has to consider such information, neither extension is automatic but rather must be based on the facts and circumstances of the particular case.

Lastly, the comment suggested the regulations provide a time frame for a partnership to respond to an IRS request for additional information during the IRS's review of a modification request. The comment recommended the time frame for responding be a minimum of 60 days and suggested that this issue is particularly significant if the request occurs near the expiration of the 270-day period. This comment was not adopted, but the IRS plans to adopt procedures that will allow a partnership time to provide additional information, when necessary, with respect to a particular request for modification. Because not all modification requests will require additional information from the partnership, this time frame is not provided for in the regulations. In addition, the response time may depend on the facts and circumstances. For example, as the comment notes, if a request for additional information occurs near the end of the 270-day period to submit information, there might not enough time to allow for a 60-day response period. While it is true the partnership and the IRS may agree to extend the 270-day period, this will not always be the case. Accordingly, a rule establishing a 60-day time frame for responding to requests for additional information in every case is not appropriate and would, in the example noted in the comment, serve as an automatic extension of the 270-day period to submit information that might not be requested by the partnership or consented to by the IRS. Nevertheless, if more information is required from the partnership, the IRS appreciates the need for partnerships to know when that information is due. The IRS plans to establish appropriate procedures through forms, instructions, or other guidance. As a result, the regulations were not revised in response to this comment.

iii. Amended Returns

Proposed § 301.6225-2(d)(2) provided rules regarding modification with respect to amended returns filed by partners. Proposed § 301.6225-2(d)(2)(i) provided that a partnership may request modification of an imputed underpayment based on an amended return filed by a relevant partner provided all of the partnership adjustments properly allocable to such relevant partner are taken into account. One comment recommended that the regulations clarify whether modification will be allowed if a partner files an amended return taking into account adjustments that make up one imputed underpayment, while not taking into account adjustments that make up a separate imputed underpayment which also affects that partner. This comment was not adopted because its recommendation contradicts the statute.

The requirement in proposed § 301.6225-2(d)(2)(i) that partners take into account all partnership adjustments derives from section 6225(c)(2)(A)(ii). Section 6225(c)(2)(A)(ii) states that when partners file amended returns in modification, that return must “take into account all adjustments” under section 6225(a) that are “properly allocable to such partners (and the effect of such adjustments on any tax attributes).” Section 6225(a) refers to “any adjustment by the Secretary to any partnership-related items with respect to any reviewed year of a partnership . . .” Section 6225(c)(2)(A)(ii)'s reference to “all adjustments” under section 6225(a) does not distinguish between partnership adjustments that result in an imputed underpayment and partnership adjustments that do not result in an imputed underpayment. By not distinguishing between the types of partnership adjustments, the language of section 6225(c)(2)(A)(ii) indicates that all partnership adjustments must be taken into account by partners filing modification amended returns, as opposed to only those adjustments that are associated with the imputed underpayment for which modification is requested. Consistent with section 6225(c)(2)(A)(ii), the final regulations under § 301.6225-2(d)(2)(i) require that even in the case of multiple imputed underpayments, partners filing modification amended returns must take into account all partnership adjustments, not just the adjustments associated the imputed underpayment for which modification is requested.

The comment also asked whether there are any specific requirements or limitations that apply in the case of an amended return modification request made with respect to one imputed underpayment, but not with respect to a separate imputed underpayment. Nothing in the regulations imposes specific requirements or limitations on the partnership or its partners when utilizing amended return modification with respect to only one imputed underpayment. The partnership and its partners must comply with all the requirements under § 301.6225-2(d)(2) with respect to any request for amended return modification, including a request made for only one imputed underpayment in the case of multiple imputed underpayments.

Proposed § 301.6225-2(d)(2)(ii)(A) provided that an amended return modification request will not be approved unless the partner filing the amended return has paid all tax, penalties, additions to tax, additional amounts, and interest due as a result of taking into account the adjustments at the time such return is filed with the IRS. One comment suggested that the full payment requirement under § 301.6225-2(d)(2)(ii)(A) should be satisfied if the partner is in compliance with available IRS administrative processes to make full payment, for example, an installment payment agreement. Another comment recommended that the regulations permit partners to submit requests for installment agreements or offers in compromise within the 270-day modification period. These comments were not adopted.

Section 6225(c)(2)(A)(iii) provides that if one or more partners file amended returns during modification, such returns take into account the adjustments properly allocable to such partners, and “payment of any tax due is included with such returns,” the imputed underpayment is determined without regard to the adjustments so taken into account. Payment of any tax due is a statutory requirement under section 6225(c)(2)(A)(iii). Consistent with section 6225(c)(2)(A)(iii), proposed § 301.6225-2(d)(2)(ii)(A) required full payment of any tax, penalties, and interest due at the time the amended return is filed with the IRS. If payment is not included with the amended return, the IRS will not approve modification with respect to the amended return.

This rule is necessary to ensure that the IRS collects the entire amount of tax that results from the partner's share of partnership adjustments before approving the partnership's request that the imputed underpayment be calculated without regard to those adjustments. Allowing a partner to enter into an installment agreement undermines the ability of the IRS to collect tax on those adjustments both from the partnership, because the adjustments would no longer be reflected in the imputed underpayment, and from the partner that may ultimately default on the installment agreement. If a partner ultimately does not pay, the IRS may not be able to collect against that partner and likely would be outside the time period within which it must make partnership adjustments, preventing the IRS from collecting any additional imputed underpayment from the partnership. Similar concerns are presented by allowing a partner to enter into an offer in compromise. Moreover, a rule permitting partners to request installment agreements and offers in compromise as alternatives to full payment would increase the administrative burden on the IRS by requiring the IRS to evaluate whether such requests were appropriate, slowing down the modification process in general, and complicating the amended return process specifically. Accordingly, the final regulations retain the rule that full payment of any tax, penalties, and interest due as a result of taking into account the partner's allocable share of adjustments is required in order for modification to be approved with respect to a partner's amended return. In addition, the final regulations under § 301.6225-2(c)(2)(i) clarify that a failure by any person to make any payments required with respect to a modification request within the time restrictions described in § 301.6225-2(c) will result in a denial of a modification request.

Proposed § 301.6225-2(c)(3) provided that all information required under § 301.6225-2 with respect to a request for modification must be submitted on or before 270 days after the date the NOPPA is mailed, unless that period is extended with the permission of the IRS. Several comments recommended partners only be required to file amended returns or make payments on those returns after the issuance of the FPA to allow the court to review the partnership adjustments before modification is requested. One comment recommended that, to provide an adequate amount of time, partners should be allowed at least 270 days from the time of the receipt of an FPA to file amended returns. The comment further recommended that the 270-day period be tolled at any time during which a court proceeding pursuant to section 6234 is ongoing. Another comment recommended that the final regulations commit the IRS to freely grant extensions of the 270-day period and other relevant periods and allow taxpayers to seek modification of the underpayment by filing an amended return, or use the alternative procedure to filing amended returns, within 60 days after there has been a final determination in the partnership case. These comments were not adopted.

First, allowing modification requests, including amended returns, after the FPA is mailed or after there is a court decision with respect to the partnership adjustments is contrary to the statutory scheme under section 6225(c). The statutory scheme under section 6225, section 6231, and section 6235 envision a process where the IRS first mails a NOPPA to the partnership that includes the proposed partnership adjustments and proposed imputed underpayment, followed by a modification period, which is followed by the FPA. The mailing of the NOPPA starts the 270 day period within which anything required to be filed or submitted in the modification process must be filed or submitted to the IRS. After the close of this 270-day period, which may be extended with the consent of the IRS, if modification is requested, the IRS has an additional 270 days to modify the imputed underpayment as necessary to reflect approved modifications and mail the FPA, which will describe the final partnership adjustments and imputed underpayment. After the FPA is issued, there is no basis for the IRS to consider further modifications. The examination is complete and the partnership may then pay the imputed underpayment or elect the push out. The partnership may also challenge the partnership adjustments in court.

Section 6225(c)(2), which provides the procedures for filing amended returns and the alternative procedure to filing amended returns was enacted at the same time as section 6225(c)(7). The amended return modification and the alternative procedure to filing amended returns are just two of many statutory modifications. Had Congress intended for there to be an exception to the 270-day period under section 6225(c)(7) for amended return modification, as suggested by the comments, Congress could have included such an exception when enacting both statutory provisions.

Second, extending the 270-day period beyond the date of the issuance of the FPA could result in several tax administration issues for the IRS. Section 6225(c)(8) provides that any modification of the imputed underpayment amount “shall be made only upon approval of such modification by the Secretary.” A request for amended return modification must therefore be approved by the IRS. If the partnership fails to comply with the requirements under the rules under § 301.6225-2, the IRS may decline to approve the request for modification. In order to adopt the comment's suggestion that amended returns and associated payments not be provided until after the FPA is issued, the IRS would need to wait to approve the modification request with respect to that amended return until after the partnership and its partners submitted what was required to be provided under the modification rules. This would prevent the IRS from including its approval or disapproval of the modification request in the FPA, delaying a determination with respect to the modification until some later date. The FPA—the notice of final partnership adjustment—is designed to be the final notice to the partnership from IRS, not an interim notice subject to further modifications or changes.

A partnership adjustment is defined under section 6241(2) as an adjustment to a partnership-related item, and a partnership-related item is defined as including an imputed underpayment. An adjustment to an imputed underpayment is, therefore, a partnership adjustment as defined in section 6241(2). The approval of a modification affects the amount of an adjustment that is taken into account in the imputed underpayment under the rules described in § 301.6225-2(b). Therefore, the IRS must approve or disapprove of a modification before the expiration of the time period for making adjustments under section 6235 or the IRS will have lost its opportunity to do so. Relatedly, and in addition to the concern about the statute of limitations, if the IRS waits until after the issuance of the FPA to make further adjustments to the imputed underpayment, modification could extend for an indefinite period of time, which would lead to uncertainty and administrative challenges for the partnership, the partners, and the IRS. This is particularly true with respect any adjustments after the mailing of the FPA because the mailing of the FPA imbues the partnership with certain rights, such as the right to petition a court for a readjustment of the partnership adjustments in the FPA and to elect the push out under section 6226 with respect to the imputed underpayment. The comment does not explain how a rule that would allow the IRS to further alter the imputed underpayment after the partnership has elected push out or petitioned a court for a readjustment would work. Such a rule would raise numerous tax administration concerns and potentially cause confusion for the partnership and its partners as to what the IRS finally determined and when.

In addition, the IRS is limited as to when it may make a partnership adjustment. According to section 6235(a)(2), “no adjustment under this subchapter for any partnership taxable year may be made after . . . in the case of any modification of an imputed underpayment under section 6225(c), the date that is 270 days [including extensions] . . . after the date on which everything required to be submitted to the Secretary pursuant to such section is so submitted.” In order to adopt the comment allowing an extension of the 270-day modification submission period beyond the issuance of the FPA, the IRS would be required to issue two FPAs. The first FPA would address the partnership adjustments and the imputed underpayment prior to consideration of modifications. The second FPA would be issued at some later date before the expiration of the period for making adjustments under section 6235. Nothing in section 6235(a)(2) prevents the IRS from mailing a second FPA; however, under section 6231(c), if the partnership petitions the original FPA under section 6234, the Secretary may not mail another notice with respect to the same taxable year in the absence of fraud, malfeasance, or misrepresentation of a material fact. In other words, in the situation contemplated by the comment, in which a partnership petitioned the FPA, in general, the IRS could not issue a second FPA to approve or deny modification issues because the IRS would be prevented from doing so under section 6231(c).

Adopting the comment's suggestion would prevent the IRS from exercising the discretion to approve modification for which Congress provided it authority in section 6225(c)(8). The IRS needs this discretion to ensure that requests for modification are appropriate for the partnership and that the administrative proceeding process is uniform between partnerships. Partners also have other options, such as subsequent amended returns, to address some concerns regarding making payments during the modification process. Accordingly, the regulations have not adopted this comments suggestion.

Proposed § 301.6225-2(d)(2)(vii)(B) provided that if a relevant partner files an amended return for purposes of modification, such partner may not file a subsequent amended return without the permission of the IRS. One comment recommended that the regulations clarify that the restriction in proposed § 301.6225-2(d)(2)(vii)(B) relates to only those items related to a partnership adjustment. Similarly, another comment recommended that the IRS ease the restriction on the ability of a taxpayer using the amended return modification procedure to file subsequent amended returns when the subsequent amended return does not affect the items included in the partnership's audit adjustments. The comment stated that requiring a taxpayer to request permission from the IRS before filing an amended return is an administrative burden in terms of time and resources for both the taxpayer and the IRS.

Another comment recommended that the regulations not prohibit a partner who has amended her return as part of the modification process from amending her return again without the permission of the Service. This comment suggested revising the forms for filing amended returns to (1) include a check-box asking whether the taxpayer filed a prior amended return for that same tax year that was the basis for a modification under section 6225(c) and (2) require any taxpayer who answers in the affirmative to attach to the subsequent amended return an explanatory statement and certain related documents, such as the prior amended return. Another comment recommended the regulations clarify that if a partner filed an amended return and paid tax on its share of adjustments, and modification was approved with respect to the amended return, the partner may later claim a refund of the tax paid if the partnership successfully appeals or contests the adjustment.

The final regulations clarify that the restriction under § 301.6225-2(d)(2)(vii)(B) only applies to subsequent amended returns that change the treatment of partnership adjustments previously taken into account on a prior amended return that was filed during modification or are filed with respect to an imputed underpayment that was taken into account on a prior modification amended return. The final regulations also removed the requirement that limited further amended returns filed with respect to an imputed underpayment. The final regulations provide exceptions to this rule if the modification amended return or all modifications become inapplicable to the reviewed year. For instance, a court could determine after the issuance of the FPA that the IRS's determination was erroneous in whole or in part, and there was no longer an imputed underpayment or the imputed underpayment should be reduced. In that case, the amended returns submitted during modification would have been with respect to an imputed underpayment that either no longer existed or was altered. The modifications in that case would either be wholly or partially inapplicable. Alternatively, during the modification process, after a partner files an amended return for purposes of modification, the IRS could deny modification under § 301.6225-2(c)(2)(i). In those cases, the partner may file a subsequent amended return to reverse the treatment of partnership adjustments taken into account as part of the request for modification that is no longer applicable, subject to the period of limitations under section 6511. In response to the comment, the final regulations also remove the requirement that the partners request permission before filing subsequent amended returns. The final regulations also clarify that the restrictions on amended returns also apply to other claims for refund.

One comment recommended clarification about whether and how the partner can file a request for refund if the IRS denies a modification based on a partner's filing of an amended return and payment of tax (or the use of the alternative procedure to filing amended returns) or if the partnership files a petition in court of the FPA which results in an adjustment in the partnership's favor. The same comment requested clarification on how a taxpayer who has filed an amended return or executed a closing agreement under section 6225 would receive the benefit of the reduced tax liability of the revised adjustment amount. Pursuant to section 7121, a closing agreement approved by the IRS is final and conclusive. Accordingly, as a general rule, a partner may not request a refund of amounts agreed to in, and paid with, a closing agreement, though the determination of whether a partner could file further amended returns or claims for refund with respect to a year in which a closing agreement was executed would depend on the facts and circumstances and the agreed upon terms of the closing agreement. As discussed earlier in this Summary of Comments and Explanation of Revisions, the final regulations under § 301.6225-2(d)(2)(vii) now clarify that partners may file additional amended returns with respect to partnership adjustments or imputed underpayments, including in the case of denied modification or court readjustment. To file a subsequent amended return, the partners must do so in accordance with forms, instructions, and other guidance prescribed by the IRS. A partner that modifies using the alternative procedure to filing amended returns as described in section 6225(c)(2)(B) that seeks a refund for an amount paid as part of those procedures must follow the rules of § 301.6225-2(d)(2)(vii)(B) and (C). There is no separate process for partners that modify using the alternative procedure to amended returns.

Former proposed § 301.6225-2(d)(2)(vii) provided that a pass-through partner may elect, solely for the purposes of modification, to take into account its share of the partnership adjustments and make a payment on behalf of its partners. If modification was approved with respect to the pass-through partner, the partnership was not permitted to request modification based on amended returns filed by upper-tier direct and indirect partners of the pass-through partner. Former proposed § 301.6225-2(d)(2)(vii). One comment suggested that the regulations should permit a modification of a pass-through partner's payment amount based on amended returns filed by its upper-tier owners.

This suggestion was adopted in the August 2018 NPRM revisions to § 301.6225-2(d)(2). Proposed § 301.6225-2(d)(2)(vi)(B), as revised in the August 2018 NPRM, provided that in accordance with forms, instructions, and other guidance, a pass-through partner making a payment under § 301.6225-2(d)(2)(vi)(A) may take into account modifications with respect to its direct and indirect partners to the extent that such modifications are requested by the partnership and approved by the IRS. Therefore, to the extent an upper-tier partner of the pass-through partner has filed an amended return, the partnership has requested modification with respect to that amended return, and the modification is provided, the pass-through partner may take into account that amended return in accordance with forms, instructions, or other guidance when making a payment in modification. The final regulations under § 301.6225-2(d)(2)(vi)(B) retain this rule.

Another comment recommended that the regulations provide more guidance regarding the form required for an amended return filed by a pass-through partner and the information that form will need to contain. This comment was not adopted. The form required for any amended return, including an amended return filed by a pass-through partner, and the information required on that form will be set forth in forms, instructions, and other guidance prescribed by the IRS. Setting forth this information in forms, instructions, and other guidance gives the IRS the flexibility to adapt the form and its contents without having to amend the regulations. This flexibility preserves government resources and expedites the time in which taxpayers will know of changes to the statement requirements. At the same time, the IRS recognizes the need of taxpayers to know of the information required in order to comply with the regulations. The IRS plans to develop and release drafts of forms and instructions for public inspection as they are completed.

Another comment recommended that the regulations address the situation in which a partner files an amended return but incorrectly calculates the interest amount due and subsequently receives an additional assessment from the IRS. The comment expressed concern that the incorrect calculation of interest and resulting shortfall in payment may result in an inadvertent denial of the modification request. Another comment recommended a rule that a de minimis shortfall of interest or penalties resulting from a good faith effort by a taxpayer to calculate the correct amount shall not result in a denial of a modification request.

The comment recommending a good faith de minimis rule to address situations in which a partner has a shortfall of interest or penalties was not adopted. First, allowing a good faith de minimis rule for interest or penalties is inconsistent with the centralized partnership audit regime's approach of allowing modification of the imputed underpayment if partners fully account for adjustments by taking them into account, paying any resulting amounts due as if the partnership and partners had reported correctly the first time. Because amended return modification is occurring years after any tax would have been due as a result of the partnership adjustment, partners with an underpayment must pay interest to compensate the government for the time value of money on the underpayments. Similarly, partners that owe a penalty must pay that penalty to fully take into account the adjustments and allow the partnership the benefit of modification for those adjustments. A de minimis rule that affirmatively blessed some dollar amount or percentage shortfall for either interest or penalties would encourage taxpayers to calculate their interest and penalties to fall within the allowed de minimis range to avoid disallowance but pay less than is required. It is inconsistent with the collection of amounts determined due on examination to systematically allow a collection of less than all that is due.

Second, administering a rule that allowed partners to underpay what is owed under § 301.6225-2(d)(2)(ii)(A) as long as they made a good faith effort and had only a de minimis short fall would result in untenable administrative complexities for the IRS. The IRS must review all modification requests within 270 days after the modification request has been submitted. The IRS will need to quickly ensure that all relevant partners have provided all information and payments necessary to approve modification. A rule that includes a good faith element would require the IRS to engage in a partner-specific inquiry with respect to any shortfall that might be within the de minimis range to determine whether partner made a good faith effort to comply. A rule that looks to the intent of the partner in determining the amount of interest and penalties is factually intense and would require an inquiry into the state of mind of the partner or that partner's tax advisor. In a fraction of the time it would take to make such an inquiry, the IRS could instead request and receive full payment from the partner. Therefore, it is not administrable to inject this additional, burdensome good faith de minimis shortfall rule in the final regulations, when the current requirement of full pay is both more administrable and less burdensome on the IRS and partners.

If the partnership representative becomes aware of the shortfall before expiration of the 270-day period, the partnership representative may request an extension of the 270-day period in order to allow for full payment to be made before the modification period ends. In this way, the partnership representative can take steps to ensure that all requirements under § 301.6225-2(d)(2) were satisfied.

Proposed § 301.6225-2(d)(2)(ii)(C) provided that in the case of a reallocation adjustment, all partners affected by such adjustment must file amended returns in order for the IRS to approve modification with respect to those amended returns. One comment suggested that the partners affected by the reallocation adjustment should be required to file amended returns only if there is evidence of a net underpayment of tax by the partners as a whole. The comment suggested as an alternative that the partners be allowed to attach an explanation or information statement to their adjustment year return rather than filing an amended return for the reviewed year. These suggestions were not adopted.

Section 6225(c)(2)(C) provides that in the case of a reallocation adjustment, amended return modification applies only if all the requirements of either amended return modification or the alternative procedure to filing amended returns “are satisfied with respect to all partners affected by such adjustment.” The statute does not provide any exception to this rule, including an exception for situations in which there is evidence of a net underpayment of tax. Accordingly, the final regulations retain the rule that all partners affected by a reallocation adjustment must file amended returns or utilize the alternative to filing amended returns in order for modification to be approved. This rule ensures that all relevant partners affected by the reallocation adjustment take into account their appropriate shares of that adjustment and thereby ensures such partners receive the appropriate tax benefits for the taxable year subject to the adjustment.

Furthermore, payment and collection of an underpayment is not the only issue required to be resolved by the filing of modification amended returns. In some cases, the purpose of the amended returns is to take into account the tax attributes that may have effects on other modification years. Certainly, in some cases, the tax effect of adjustments taken into account in one year may be offset by tax effect of adjustments in another year or by another partner, but as described in section 3.A. of this preamble, the unmodified imputed underpayment is designed by statute to take into account only the reviewed year and it does not take into account the specific tax attributes of any partner or the effects of the partnership adjustments in modification years or intervening years. An unmodified imputed underpayment will often result in an amount that is higher than what the partners collectively would have paid had they taken the adjustments into account properly in the reviewed year. The unmodified imputed underpayment protects the IRS's interests in collecting at least the amount of tax that should have been paid by the partners without having to separately examine and track all the partners. In other words, the unmodified imputed underpayment represents a simple way to allow the partnership to pay, and the IRS to collect, as amount related to the partnership adjustments without having to delve into the specific tax attributes of each partner.

Modification, however, provides an opportunity for the partners and the partnership to demonstrate that specific tax attributes of partners should have an effect on the imputed underpayment. With respect to reallocation adjustments, if partners seek to receive the benefit of modification, each partners subject to a reallocation adjustment must follow the statutory requirement to file amended returns for all adjustments in a reallocation adjustment. It may be the case that one partner pays on modification and another partner is entitled to a refund. However, such a result is unknown until the partners demonstrate that fact through modification. More importantly, section 6225(c)(2)(C) expressly requires that all partners have taken into account all partnership adjustments and related tax attributes for the modification years and future years. This statutory mandate makes clear that the purpose of this modification is not to ensure that there is a net tax payment with respect to the partnership adjustments, but instead to ensure that the proper partners have taken the adjustments into account correctly, including in all modification years. The requirement that all partners affected by a reallocation file amended returns is a necessary condition for modification to be approved.

Similarly, the comment's suggestion that partners attach a statement to their adjustment year returns attesting to the fact that they had a net underpayment as a result of the adjustments is not workable. In an administrative proceeding, the adjustment year is the year in which the FPA is mailed under section 6231 or, if the partnership challenges the adjustments in court, the year such decision becomes final. Section 6225(d)(2). If a partner was one of the partners subject to a reallocation adjustment and failed to file an amended return, none of the other amended returns from other partners subject to the reallocation adjustments could be approved as a modification. As a result, the imputed underpayment would be determined in the FPA without reduction with respect to those adjustments. Attaching a statement on the next filed return of the partner that failed to file an amended return would have no effect on the imputed underpayment already finally determined.

Recognizing the costs and burdens this rule may create for partnerships, partners, and the IRS in cases where it is clear one partner will not owe tax on its share of a reallocation adjustment, the Treasury Department and the IRS included a rule within proposed § 301.6225-2(d)(2)(ii)(C) to mitigate the potential impact of the requirement that all partners file amended returns. Proposed § 301.6225-2(d)(2)(ii)(C) provided that modification may be approved in the case of a reallocation adjustment even if a relevant partner affected by the adjustment does not file an amended return or utilize the alternative procedure provided the partner takes into account its share of the adjustment through other modifications approved by the IRS or if a pass-through partner takes into account the relevant adjustments. For instance, in the case of an adjustment that reallocates a loss from one partner to another, the IRS may determine that the requirements of § 301.6225-2(d)(2)(ii)(C) have been satisfied if one affected relevant partner files an amended return taking into account the adjustment and the other affected relevant partner signs a closing agreement with the IRS taking into account the adjustments. Proposed § 301.6225-2(d)(2)(ii)(C).

One comment recommended that the regulations clarify whether a tax-exempt partner eligible for tax-exempt modification under § 301.6225-2(d)(3) and allocated a share of a reallocation adjustment must file an amended return to satisfy the requirements under § 301.6225-2(d)(2) in order for the IRS to approve a modification request with respect to such partner. The comment recommended adding to the regulations either an explicit statement or an example indicating that such a filing is not necessary provided the IRS is satisfied that the relevant partner qualifies as a tax-exempt entity. This comment was partially adopted by adding a sentence to § 301.6225-2(d)(2)(ii)(C) indicating the IRS may determine the amended return requirement in the context of reallocation adjustment is satisfied to the extent an affected relevant partner meets the requirements of § 301.6225-2(d)(3) regarding tax-exempt partners. The satisfaction of the requirements of § 301.6225-2(d)(2) (amended return modification and the alternative procedure) is only satisfied to the extent of the tax-exempt portion as defined in § 301.6225-2(d)(3)(iii). Therefore, if certain partnership adjustments allocable to tax-exempt partners are subject to tax, and the partner wishes to take advantage of amended return modification, the tax-exempt partner may have to file an amended return to pay tax on the portion of adjustments allocable to that partner which are subject to tax. The final regulations do not add an example to this effect because the plain language of § 301.6225-2(d)(2)(ii)(C) addresses the point raised by the comment.

One comment recommended that the regulations provide an additional modification method in the case of reallocation adjustments that would allow a partner to whom a net negative adjustment is allocated to file an amended return (or use the alternative procedure to filing amended returns) to claim a refund of tax arising from such adjustment, on the condition that the partner to whom the net positive adjustment is allocated, or the partnership, has paid the tax attributable to the net positive adjustment. Similarly, another comment recommended that the regulations permit a modification of an imputed underpayment where only the partner experiencing additional income (or less deduction, loss, or credit) as a result of a reallocation adjustment files an amended return. These comments were not adopted.

As discussed earlier in this section of this preamble, section 6225(c)(2)(C) provides that in the case of a reallocation adjustment, amended return modification applies only if all the requirements of either amended return modification or the alternative procedure to filing amended returns “are satisfied with respect to all partners affected by such adjustment.” This rule demonstrates that reallocation adjustments made by the IRS under the centralized partnership audit regime are included in the calculation of the imputed underpayment unless all partners affected by such adjustments take them into account. Section 6225(c)(2)(C) does not contain an exception to the rule that all partners take the adjustments into account. Consistent with section 6225(c)(2)(C)'s requirement that all affected partners take the reallocation adjustments into account, the IRS has exercised its discretionary authority under section 6225(c)(6) to permit modification in the case of a reallocation adjustment where a relevant partner affected by such adjustment has met the requirements of another modification method and that modification has been approved by the IRS. This regulatory exception fits squarely within the statutory framework of ensuring that all partners affected by a partnership adjustment take into account their share of that adjustment and recognize the tax effects of such adjustments. Adopting the approach suggested by the comments, one where either only the loss partner or only the income partner take the adjustments into account, would undercut the statutory framework and directly contradict the plain language of the statute. A rule that does not account for all aspects of a reallocation adjustment would run contrary to the collection mechanism of the centralized partnership audit regime with respect to reallocation adjustments. The statutory framework requires either that the partnership pay an imputed underpayment representing the additional tax effects of the reallocation adjustment in the adjustment year and take the negative adjustment aspects into account in that same year or all affected partners from the reviewed year must fully account for their share of the reallocation adjustment.

One comment recommended that the regulations clarify whether a taxpayer filing an amended return or requesting a closing agreement under section 6225 for purposes of modification is required to take into account and pay any additional taxes due under chapters 2 and 2A of the Code. This comment was adopted. The final regulations clarify that a partner filing an amended return or using the alternative procedure to filing amended returns only is required to pay tax due under chapter 1 of the Code with respect to the amended return and the alternative procedure to filing amended returns. The exception to the limitation of tax to chapter 1 tax is for a pass-through partner filing an amended return under § 301.6225-2(d)(2)(vi) because the pass-through partner, but for § 301.6225-2(d)(2)(vi), might otherwise not owe tax under chapter 1. Nothing in the final regulations limits the IRS's authority under section 6241(9). The type of tax paid in a closing agreement, however, will depend on the terms of the closing agreement. The final regulations clarify the type of tax paid in these situations in §§ 301.6225-2(d)(2)(ii)(A) and (d)(8).

Another comment asked about the effect on the IRS's approval of modification in the case that a partnership or partner fails to pay taxes under chapters 2 and 2A in modification. Because the final regulations clarify that a partner is only required to pay chapter 1 tax in amended return modification or in the alternative procedure to filing amended returns, the failure to pay taxes under chapters 2 and 2A is irrelevant to the approval or denial of modification. The questions asked by the comment are therefore moot, and no changes were made in response to the comment.

Section 6225(c)(2)(D) provides that section 6501 and 6511 shall not apply with respect to returns filed in modification. A comment was concerned that amended returns filed after the expiration of the time period in section 6511 would be automatically rejected by IRS Service Centers, causing confusion and uncertainty about whether the amended return has, in fact been filed, and if so, whether it was timely. The comment recommended that the IRS develop a procedure for the filing of amended returns with the IRS personnel handling the partnership's examination so that this person can make sure that the return is filed and properly processed or alternatively that the regulations directed taxpayers to include a banner on the top of the amended return stating, in red ink, “Filed Pursuant to Section 6225(c),” to alert the Service Center that this amended return should not be automatically rejected if it is otherwise untimely under section 6511. Another comment recommended that the final regulations also require that the reviewed-year partner include in the affidavit filed with the amended return modification request the partner's TIN and contact information to enable the IRS to locate easily the amended return and payment in its databases. The IRS intends to develop a process through which the partners would file their amended returns, but the regulations do not specify the details of that process. The IRS will develop forms and instructions directing the partnership and the partners as to how and where to file their amended returns submitted in modification, and the IRS intends to request the relevant partner's TIN as part of that process.

Prior to the enactment of the TTCA, section 6225(c)(2) stated that section 6511 did not apply with respect to amended return modification, but it was silent on whether section 6501 limitations on assessment applied. If a partner's period under section 6501 was closed at the time of modification, the partner might not be able to participate in amended return modification. One comment recommended that the IRS resolve this issue by allowing partners to extend the relevant section 6501 periods. This comment was received in response to the June 2017 NPRM, prior to the enactment of the TTCA. The TTCA explicitly provided that section 6501 does not apply with respect to returns filed in modification, so the need for such extensions no longer exists.

iv. The Alternative Procedure To Filing Amended Returns

The TTCA created an additional statutory modification under section 6225(c)(2)(B), titled the alternative procedure to filing amended returns (the alternative procedure), which has been referred to as the “pull in” or “push in.” Several comments recommended that the Treasury Department and the IRS adopt these procedures in response to the June 2017 NPRM, prior to the enactment of the TTCA. The August 2018 NPRM proposed rules related to the alternative procedure, adopting those comments in response to the enactment of the TTCA, which included the alternative procedure.

One comment suggested that the final regulations should include a modification procedure whereby an imputed underpayment is reduced when the partnership provides sufficient evidence that the adjustments underlying the imputed underpayment would have resulted in a smaller imputed underpayment if they had been taken into account according to how the partners and the partnership actually treated the partnership-related item. The comment described this concept as similar to the “pull-in” procedure included in the TTCA. The comment has not been adopted in its entirety because no one modification provision specifically allows the partnership to demonstrate that the imputed underpayment would be reduced if the partnership and partners had taken the adjustment into account. The purpose of the modification process is not only to reduce the amount of the imputed underpayment, but for those partners that take the adjustments into account as part of the modification requested, they are required to pay any additional tax, interest and penalties due and agree to adjust their tax attributes in exchange for the IRS approving the modification. As such, the regulations contain rules related to the alternative procedure as defined in section 6225(c)(2)(B) and § 301.6225-2(d)(2)(x) and under that procedure the partnership may satisfy the requirements of amended return modification by submitting on behalf of relevant partners, in accordance with forms, instructions, and other guidance prescribed by the IRS, all information and payment of any tax, penalties, additions to tax, additional amounts, and interest that would be required to be provided if the relevant partner were filing a modification amended return. The partnership must also demonstrate that relevant partners have agreed to take into account tax attributes consistent with taking into account the partnership adjustments allocable to that partner. The regulations provide another modification under § 301.6225-2(d)(10), where the IRS will consider any other request for modification and determine whether it is appropriate in the circumstances.

Another comment recommended that the modifying partner using the “push in” procedure deal directly with the IRS exam team during the partnership audit because many partners will not want to provide the details of their financial affairs to the partnership representative or the partnership. The regulations do not provide specific details as to what information will need to be provided to the IRS under the alternative procedure, but the IRS intends to develop such processes. The partnership, not the partners, however, requests amended return modification, and the partnership may satisfy those requirements through the alternative procedure. Because the partnership is responsible for making the modification request, the comment was not adopted at this time. The processes the IRS develops may ultimately provide that the partners submit some information directly to the IRS, but the partners will likely be required to provide some information to the partnership representative to request modification. Nothing in the regulations prevents the partnership from working with third parties or selecting a partnership representative that will not share the details of the partners' financial affairs directly with the partnership. The partnership, the partnership representative, and the partners will ultimately be required to meet filing requirements established in forms, instructions, and other guidance.

The same comment also recommended that partners who establish that they are owed a refund receive such refund through the alternative procedure rather than by filing an amended return or relying on § 301.6225-3, which allows an adjustment that does not result in an imputed underpayment to be taken into account in the adjustment year. The comment recommended that refunds in the alternative procedure context only be allowed after all relevant partners have paid their tax and after the partnership has paid any remaining imputed underpayment. This comment was not adopted. Requests for the alternative procedure under § 301.6225-2(d)(2)(x) are not claims for refunds for the reasons described later in this section of this preamble. To the extent the comment was suggesting that refunds could be claimed after the issuance of the FPA, which is the point after which the partnership would have been able to pay the imputed underpayment, the partners may only do so pursuant to § 301.6225-2(d)(2)(vii).

One comment recommended that if partnerships and their partners will be permitted some simplified method of modification (without the need to file amended returns), the regulations should fully explain that concept. This comment was made prior to the passage of the TTCA and the issuance of the August 2018 NPRM. The preamble to the August 2018 NPRM explains the alternative procedure as enacted by the TTCA. This section of the preamble to these regulations provides additional explanation of the alternative procedure. In addition to the regulations, the alternative procedure will be further described in forms, instructions and other guidance as the IRS processes surrounding the alternative procedure are developed further.

Another comment requested clarification on the interaction of the alternative procedure with other provisions described in the proposed regulations. For instance, the comment stated the language under proposed § 301.6225-2(d)(2)(x) was unclear whether a taxpayer reporting a negative reallocation or recharacterization adjustment is eligible to use the alternative procedure. No changes were made to the regulations in response to this comment.

There is nothing in the regulations that precludes the partnership from requesting modification with respect to a relevant partner under the alternative procedure where the relevant partner would otherwise be entitled to a refund had the partner instead filed amended returns. However, the regulations state that a request for modification under the alternative procedure is not a claim for refund with respect to any person. As a result, a relevant partner may not make a claim for refund via the alternative procedure. This rule is based on the statutory requirement under section 6225(c)(2)(B)(i) that requires a partner to pay any amount due under section 6225(c)(2)(A)(iii) if the partnership requests the alternative procedure. If a partner, after taking into account all partnership adjustments allocable to the partner, would not owe any amount as required in amended return modification under section 6225(c)(2)(A)(iii), the partner is not required to make a payment as part of the alternative procedure. The fact that a partner may utilize the alternative procedure without making a payment does not, however, allow the partner access to a refund through the alternative procedure.

The alternative procedure as described in section 6225(c)(2)(B) does not provide that the partners may obtain refunds. The alternative procedure provides a streamlined process for partners and the partnership generally to those partners paying additional amounts of tax, in lieu of filing amended returns. This streamlined nature of the alternative procedure process also benefits the IRS. By limiting the alternative procedure to just those relevant partners that are making payments required under section 6225(c)(2)(B)(i) (or that owe no additional tax), the IRS should be able to more quickly and efficiently process requests under the alternative procedure. Partners that have been allocated negative adjustments, including reallocation or recharacterization adjustments, may take those adjustments into account using the alternative procedure but by doing so will forego any claim for refund of any amounts related to taking those adjustments into account. In other words, if, for instance, the partner had offsetting income against which the negative adjustment might be netted, the partner could utilize the alternative procedure to make whatever payment resulted from the remaining offsetting income. If the partner would be entitled to a refund as a result of its allocated adjustments, the partner must use the amended return procedures to obtain that refund. Using the amended return procedures allows the IRS to track the refund appropriately and ensure it is processed efficiently.

The same comment also stated that it was unclear if the alternative procedure would trigger the restrictions on further amended returns described in § 301.6225-2(d)(2)(vii)(B). The final regulations under § 301.6225-2(d)(2)(vii)(B) clarify that the restrictions on subsequent amended returns or claims for refund apply equally to the amended return process and the alternative procedure. A subsequent amended return or claim for refund is most likely to occur outside the centralized partnership audit regime process. Because the alternative procedure does not exist outside the centralized partnership audit regime, there is no method by which a partnership could use the alternative procedure to obtain a refund of amounts paid during modification. The partner may file a subsequent amended return, however, if the circumstances described in § 301.6225-2(d)(2)(vii)(C) are met.

v. Rate Modification

Under § 301.6225-2(d)(4), a partnership may request modification based on a lower rate of tax for the reviewed year with respect to adjustments that are allocable to a relevant partner that is a C corporation and adjustments with respect to capital gains or qualified dividends that are allocable to a relevant partner who is an individual. One comment suggested that the rate modification procedures accommodate situations in which the sole adjustment is a recharacterization of capital gain as ordinary income. In that situation, the adjustment increasing ordinary income is a net positive adjustment that results in an imputed underpayment, and the adjustment decreasing capital gain is a net negative adjustment that does not result in an imputed underpayment. See § 301.6225-1.

The comment recommended revising the rate modification procedures to provide that an individual partner may file an amended return, or use the alternative procedure, to establish that the partner previously paid tax on the recharacterized gain at the lower rate with the result that the portion of the net positive adjustment allocable to such partner would be subject to tax only at the difference between the highest tax rate and such lower rate. In addition, the comment recommended that the rate modification procedures allow a corporate partner to demonstrate that it paid tax on capital gain with the result that the portion of the net positive adjustment allocable to the corporate partner would be subject to tax at a zero percent rate, as corporate tax rates on capital gains equal rates on ordinary income.

Rate modification is designed to address situations in which there is an adjustment to a particular type of income that is allocable to an individual or an adjustment that is allocated to a corporate taxpayer. A partnership may demonstrate that a lower rate of tax applies with respect to that income type or based on the type of taxpayer. Section 6225(c)(4)(A) (flush language) limits the rates that may apply by providing that “[i]n no event shall the lower rate determined . . . be less than the highest rate in effect with respect to the income and taxpayer . . . .” Proposed § 301.6225-2(d)(4) provided a rule consistent with this statutory mandate. For instance, with respect to an adjustment attributable to a C corporation, the highest rate in effect for the reviewed year with respect to all C corporations would apply to that adjustment, regardless of the rate that would apply to the C corporation based on the amount of that C corporation's taxable income. The comment suggested a rule where the rate applied to the recharacterized income allocable to the C corporation would be 0 percent because there is no reduced capital gains rate for C corporations. Zero is lower than the highest rate applicable to a C corporation and as a result is not permitted by statute. Similarly, for the individual in the comment's suggestion, for taxable year 2018 the highest rate is 37 percent and the highest rate for capital gains is 20 percent. The difference between these two rates is 17 percent, which is lower than the highest rate for capital gains for an individual and as a result not permitted by statute. Accordingly, the comment was not adopted.

In contrast, the amended return (or the alternative procedure to filing amended returns) allows a partner to take into account the partner's share of adjusted items and apply the specific tax rate that applies to the partner's amount of taxable income. When taking into account her share of the adjustments, which includes both the adjustment increasing ordinary income and the adjustment decreasing capital gain, the partner is able to offset additional partnership income with any permissible deductions. For example, a partner may utilize the increase in capital loss to offset the capital gain that was originally reported and subsequently recharacterized, thereby reducing the partner's tax on capital gains to potentially zero and paying tax on her share of ordinary income at the partner's specific effective tax rate.

To the extent the comment was suggesting that the Treasury Department and IRS exercise its discretionary authority under section 6225(c)(6), the Treasury Department and IRS decline to do so because adopting such a rule would present administrability concerns for the IRS. For example, the corporate partner described by the comment may or may not have paid tax on capital gain on the corporate partner's original return; there may have been offsetting capital losses. The most efficient way from a tax administration perspective for the partnership and the corporate partner to demonstrate that the corporate partner previously paid tax on the capital gain is the amended return process (or the alternative procedure). By filing an amended return, the corporate partner can take into account the adjusted amount of both ordinary income and capital loss, and assuming those adjustments could offset on the corporate return, the corporate partner would owe no additional tax and the adjustments taken into account by the corporate partner would be disregarded from the total netted partnership adjustment. See § 301.6225-2(b)(2). An amended return, or an alternative procedure submission, allows the IRS to understand better what the corporation took into account on its original return.

Proposed § 301.6225-2(b)(3) provided rules for calculating an imputed underpayment in the case of a rate modification. The first step in determining an imputed underpayment in the case of a rate modification is to determine each relevant partner's distributive share of the partnership adjustments based on how each adjustment subject to rate modification would be properly allocated under section 702 to such relevant partner in the reviewed year. Proposed § 301.6225-2(b)(3)(iii)(A). In the case of an adjusted item that was specially allocated to a partner or group of partners, however, each relevant partner's distributive share is determined based on the amount of net gain or loss to the partner that would have resulted if the partnership had sold all of its assets at their fair market value as of the close of the reviewed year. Proposed § 301.6225-2(b)(3)(iv).

One comment suggested that the requirement to determine the partner's distributive share based on a hypothetical sale of all partnership assets at fair market value as of the close of the reviewed year is administratively burdensome and difficult for partnerships to apply many years after the calculation date. The comment also suggested that the lack of a definition for fair market value in the statute and in the regulations will generate significant disputes between the IRS and partnerships. In order to simplify the administration of this rule, the comment recommended that the regulations should define fair market value solely for purposes of this rule as a more easily determined amount, such as using section 704(b) basis. This comment was not adopted, although the final regulations do provide an alternative method for determining a partner's distributive share in the case of special allocations as described later in this section of this preamble.

Section 6225(c)(4)(B)(ii) provides if an imputed underpayment is attributable to the adjustment of more than one item, and any partner's distributive share of such items is not the same with respect to all such items, then the portion of the imputed underpayment to which the lower rate applies with respect to such partner shall be determined by reference to the amount which would have been the partner's distributive share of net gain or loss if the partnership had sold all of its assets at their fair market value as of the close of the reviewed year of the partnership. As discussed later in this section of this Summary of Comments and Explanation of Revisions, the IRS recognizes that there may be concerns about the burden a fair market value analysis might create on both the partnership and the IRS. The Treasury Department and the IRS considered using the authority under section 6225(c)(6) to expand modification to use section 704(b) basis, but the recommendation to use section 704(b) basis is also flawed. Not all partnerships have section 704(b) basis numbers to which the partnership and the IRS could refer for modification purposes. Accordingly, the section 704(b) basis alternative would only be available to certain partnerships, and the IRS would prefer to provide an alternative option to the fair market value analysis that would be available to all partnerships. In addition, there is concern that some partners may not have accurate records for section 704(b) basis. As discussed later in this section of the preamble, the Treasury Department and the IRS did exercise the authority under section 6225(c)(6) to provide an option for special allocation rate modification that would apply to all partnerships.

The comment suggested, as an alternative to defining fair market value, that the regulations permit the partnership to request that adjustments subject to the special allocation rule under § 301.6225-2(b)(3)(iv) be placed in a specific imputed underpayment separate from other adjustments. The comment suggested this process would allow for the adjustments to be allocated solely to the affected relevant partners in the appropriate manner, and also recommended that the request to designate a specific imputed underpayment in this context be considered separately from other modification requests.

The process suggested by the comment was arguably permissible under former proposed § 301.6225-2(d)(6). Under former proposed § 301.6225-2(d)(6), a partnership was permitted to request during modification that one or more partnership adjustments taken into account to calculate one general or specific imputed underpayment be taken into account to calculate a different specific imputed underpayment. Former proposed § 301.6225-1(e)(2)(iii) had defined a specific imputed underpayment as an imputed underpayment with respect to adjustments to an item or items that were allocated to one partner or a group of partners that had the same or similar characteristics or that participated in the same or similar transaction. In the case of a special allocation to a group of partners, however, the partners may not necessarily share the same characteristics or have participated in the same transaction. Accordingly under former proposed § 301.6225-1(e)(2)(iii), certain specially allocated items may have been eligible for placement in a specific imputed underpayment while others may not.

This discrepancy was addressed by the revisions to proposed § 301.6225-1(g)(2)(iii) in the August 2018 NPRM. Proposed § 301.6225-1(g)(2)(iii) provided that the IRS may designate a specific imputed underpayment with respect to adjustments to items that were allocated to a partner or group of partners that had the same or similar characteristics, that participated in the same or similar transaction, “or on such other basis as the IRS determines properly reflects the facts and circumstances.” A partnership may request designation of a specific imputed underpayment during the examination or during modification. See § 301.6225-2(d)(6). Accordingly, because the process suggested by the comment is contemplated by the proposed regulations, no change was made in the final regulations to response to this comment.

With respect to the comment's request for an alternative to fair market value, the Treasury Department and the IRS recognize that a determination of fair market value may present challenges for taxpayers and the IRS. For instance, obtaining a fair market value analysis may require the hiring of experts by the taxpayer, thereby increasing the costs of modification. Depending on the type of assets or the amount at issue, the IRS may need to employ its own experts to ensure that the taxpayer's analysis is correct. Recognizing these costs and administrative burdens, the Treasury Department and the IRS have exercised the authority under section 6225(c)(6) to “provide for additional procedures to modify imputed underpayment amounts on the basis of such other factors as the Secretary determines are necessary or appropriate” to carry out the purposes of section 6225(c). Pursuant to that authority, the final regulations under § 301.6225-2(b)(3)(iv) allow a partnership requesting rate modifications in the case of special allocations to determine the distributive share for all adjustments to which the lower rate applies with respect to all partners based on the test under either section 6225(c)(4)(B)(i) or section 6225(c)(4)(B)(ii).

The rule under the final regulations allows partnerships and partners to request modification based on what they determine is the most appropriate method to measure partners' distributive shares. This rule provides an alternative to the fair market value analysis for partnerships and partners which comments suggested, and the Treasury Department and the IRS agree, may be too difficult or costly. The rule, however, does not remove the ability of a partnership to request modification based on section 6225(c)(4)(B)(ii). The final regulations also clarify that the distributive share referenced in section 6225(c)(4)(B)(i) is the distributive share as determined in the NOPPA, and if no determination regarding that distributive share was made in the NOPPA, the rules of subchapter K of chapter 1 of the Code (subchapter K).

The same comment also recommended that the regulations clarify that if the IRS requires a partnership to make the deemed sale calculation envisioned in proposed § 301.6225-2(b)(3)(iv), the regulations provide that such action is not considered a revaluation for purposes of section 704. This comment was adopted. A sentence has been added to the final regulations under § 301.6225-2(b)(3)(iv) to make clear that any calculation by the partnership that is necessary for purposes of complying with the rule under § 301.6225-2(b)(3)(iv) is not a revaluation for purposes of section 704.

vi. Certain Passive Losses of Publicly Traded Partnerships

Proposed § 301.6225-2(d)(5) provided rules for modification regarding certain passive activity losses of publicly traded partnerships. Pursuant to proposed § 301.6225-2(d)(5), in the case of a publicly traded partnership that is a relevant partner, an imputed underpayment is determined without regard to the portion of any adjustment the partnership demonstrates would be reduced by a specified passive activity loss which is allocable to a “specified partner.” Proposed § 301.6225-2(d)(5)(iii) defined specified partner as a person that is a partner of a publicly traded partnership; that is an individual, estate, trust, closely held C corporation, or personal service corporation; and that has a specific passive activity loss with respect to the publicly traded partnership. One comment recommended that the definition of specified partner include partnerships to accommodate persons that hold an indirect interest in a lower-tier partnership that is under examination through one or more upper-tier partnerships. The final regulations do not adopt this definition of specified partner, but the final regulations do accommodate persons that hold an indirect interest in the partnership under examination.

In the August 2018 NPRM, the Treasury Department and the IRS used the authority under section 6225(c)(6) to create a second type of partner, a qualified relevant partner, that was eligible for modification under § 301.6225-2(d)(5). A qualified relevant partner is a relevant partner that meets the requirements of a specified partner for each year starting with the first affected year through the last year for which a return was filed by the partnership. To address the recommendation made by the comment to accommodate indirect partners, the final regulations provide that an indirect partner may also be a qualified relevant partner, and therefore be eligible for modification under § 301.6225-2(d)(5), if the indirect partner is an individual, estate, trust, closely held C corporation, or personal service corporation and has a specified passive activity loss with respect to the publicly traded partnership.

Former proposed § 301.6225-2(d)(5) had provided that modification for certain passive losses of publicly traded partnerships applied equally with respect to a publicly traded partnership subject to a proceeding under the centralized partnership audit regime and where a portion of the imputed underpayment was attributable to a publicly traded partnership that is a partnership-partner. Proposed § 301.6225-2(d)(5) was revised in the August 2018 NPRM to provide that § 301.6225-2(d)(5) applies in the case of a publicly traded partnership that is a relevant partner. The final regulations provide that modification under § 301.6225-2(d)(5) applies only to the publicly traded partnership requesting modification under § 301.6225-2 (that is, the partnership under examination). This change makes the modification procedures under § 301.6225-2(d)(5) more administrable for the IRS because only the partnership under examination may request modification under § 301.6225-2(d)(5). In this way, the change also makes modification § 301.6225-2(d)(5) consistent with other types of modification. Because the final regulations accommodate certain indirect partners of the publicly traded partnership requesting modification, this change should not substantially affect the number of publicly traded partnerships and partners eligible for modification under § 301.6225-2(d)(5).

Another comment observed that section 6225(c)(5) required certain actions and calculations based on information that would not be known until the adjustment year. Pursuant to section 6225(d), the adjustment year in the case of an administrative proceeding is the year in which a case is fully adjudicated under section 6234, or if no petition is filed under section 6234, when the FPA is mailed. A modification request must be submitted within 270 days of the issuance of the NOPPA, which must be mailed before the FPA. See section 6231(b)(2)(A). As a result of these rules, section 6225(c)(5) does not operate properly in the case of an administrative proceeding. When the partnership submits modification under section 6225(c)(5), the partnership cannot know what the adjustment year is, much less what tax effects there might be in that year. The only circumstance in which section 6225(c)(5) operates properly with respect to the adjustment year is if an AAR has been issued. This is because under section 6225(d) the adjustment year in the case of an AAR is the year in which the AAR is filed.

To address these incongruences, the comment recommended that the regulations allow a publicly traded partnership to reduce an imputed underpayment based on a net decrease in the passive activity loss allocable to a specified partner in the reviewed year to the extent the partnership takes such loss into account in the taxable year immediately preceding the year in which the NOPPA is issued. This comment was not adopted, but the concerns it raises were addressed in the August 2018 NPRM. In the August 2018 NPRM, the Treasury Department and the IRS used the authority under section 6225(c)(6) to provide that the partnership may request modification under § 301.6225-2(d)(5) with respect to the adjustment year or the most recent year for which the publicly traded partnership has filed a return under section 6031.

The Treasury Department and the IRS acknowledge that the most recent year for which a return was filed may not always be the year immediately before the issuance of the NOPPA, as in the rule suggested by the comment. However, using the taxable year for the most recently filed return allows the publicly traded partnership to refer to whatever return is the most recently filed, even if that return was filed shortly after the issuance of the NOPPA. This flexibility allows the partnership to take into account the information known as of the most recent tax year. If the rule were to require the publicly traded partnership to take into account information from a return filed before the issuance of the NOPPA, as suggested by the comment, the return filed before the issuance of the NOPPA might not be the most recent return. For example, the return filed prior to the issuance of the NOPPA could have preceded the NOPPA by several months. After the NOPPA was issued and at the time the partnership is considering submitting a modification request, the partnership could have filed the next year's return reflecting the next year's passive activity losses, which might differ from the losses reported on the return filed prior to the issuance of the NOPPA. The Treasury Department and the IRS have an interest in ensuring that the most current tax amounts are used in determining whether a modification request under § 301.6225-2(d)(5) should be approved. Given this interest, the rule in the final regulations uses the most recently filed return, rather than the comment's suggestion to use the return filed before the issuance of the NOPPA.

In addition, the rule suggested by the comment would require the partnership to know what adjustments would be included in the NOPPA and make adjustments on its return to take such adjustments into account, prior to the issuance of the NOPPA. If the adjustments in the NOPPA somehow differed from the adjustments the partnership took into account on its return, the modification might be denied because the partnership failed to take those adjustments into account. The comment's suggestion, therefore, has its own timing issues. The final regulations provide more flexibility for the partnership to reflect the information known as of the last return filed without requiring the partnership to predict what may or may not be in the NOPPA and on which day the NOPPA will be issued. Accordingly, although the final regulations did not adopt the comment per se, the final regulations adopted an alternative solution to the problem identified by the comment.

The same comment recommended that the final regulations allow a publicly traded partnership to request modification of the imputed underpayment after the end of the adjustment year. Specifically, the comment recommended that the final regulations require the modification request to be submitted within 74 days of the end of the adjustment year, which roughly aligns with the original due date of the partnership tax return. The procedure recommended by the comment is not administrable for the IRS for the same reasons discussed earlier in section 3.B.iii. regarding accepting amended return payments after the issuance of the FPA. Because the FPA is the mechanism through which modification is approved or denied, the modification determination must be made prior to the issuance of the FPA.

The comment stated that any post-FPA modification request would cause the FPA and a denial of the modification request to be subject to judicial review separately. This statement is inaccurate. If the partnership seeks judicial review under section 6234 with respect to an FPA, in the absence of a showing of fraud, malfeasance, or misrepresentation of a material fact, the IRS is precluded from mailing another FPA to such partnership with respect to such taxable year. Section 6231(c). Accordingly, if the IRS issued an FPA within the time frames discussed earlier in section 3.B.iii. regarding amended return payments, and the partnership seeks judicial review of that FPA, the IRS would be prevented from issuing a later FPA dealing with the modification request. If the partnership submitted its modification request after the partnership had already received judicial review with respect to the adjustments in the FPA, the IRS generally could not mail an additional FPA approving or denying the modification request, and the partnership would have no determination concerning its modification request which it could challenge in court under section 6234. Accordingly, this comment was not adopted.

The same comment requested that the IRS include the denial of any modification request in the FPA to ensure that any Tax Court proceeding will also address the dispute regarding the requested modification. This comment was not adopted. Whether and how disputes regarding modification requests are subject to judicial review by a court is not within the purview of the Treasury Department's or the IRS's regulatory authority. However, to assist with any potential judicial review of modification, the IRS plans to use the FPA as the method for approving or denying modification. The final regulations do not specify, however, what is required to be included in the FPA for purposes of approving or denying modification. The absence of a regulatory rule in this regard provides the IRS flexibility to allow for the differing circumstances of each administrative proceeding and varying types of modification requests.

The final regulations in § 301.6225-2(d)(5) describe the requirements for modification by publicly traded partnerships under section 6225(c)(5). This section does not require the partnership requesting modification to provide any particular information about partners to the IRS, but the partnership must meet the general requirement to provide all information necessary to approve the modification as described in § 301.6225-2(c)(2). Specifically, § 301.6225-2(c)(2)(i) provides that the IRS may set forth in forms, instructions, and other guidance the information necessary to request modification. One comment requested that the partnership be able to provide summary information with respect to modification under § 301.6225-2(d)(5). The comment specifically suggested that the regulations provide that a partnership can substantiate the availability of specified passive activity losses by providing summary schedules reflecting the specific allocations to each specified partner of the partnership from the year such partner purchased units through the year the partnership receives the FPA.

This comment was received in response to the June 2017 NPRM, prior to the addition of the definition of qualified relevant partner. The definition of qualified relevant partner allows partners to be eligible for modification under § 301.6225-2(d)(5) provided they are partners through the year for which the most recent partnership was filed. For purposes of the comment, however, the Treasury Department and the IRS view this comment as suggesting that the partnership would provide such information for whatever years are relevant for the modification.

The final regulations do not specify what specific information is required for modification under § 301.6225-2(d)(5). Therefore, the regulations do not address whether summary schedules would be appropriate. The IRS intends to issue forms and instructions for modification procedures which will provide additional information on what will be required for modification procedures under § 301.6225-2(d)(5).

Section 301.6225-2(d)(5)(v) requires that the partnership report, in accordance with forms, instructions, and other guidance prescribed by the IRS, to each specified partner or qualified relevant partner the amount of the reduction in suspended passive loss carryovers. One comment suggested that the easiest way to do so is to incorporate such reporting into the Schedules K-1 distributed to such partner at the end of the adjustment year. This comment was received in response to the June 2017 NPRM. Therefore, it could not have taken into account the rule from the August 2018 NPRM that allowed for use of the year of the most recently filed return. The final regulations do not specify the manner in which information must be reported under § 301.6225-2(d)(5)(v). Rather, the regulations defer the manner of reporting to forms and instructions. This provides flexibility to the IRS to gain experience with the forms it intends to develop for purposes of assisting partnerships in complying with the reporting requirements of § 301.6225-2(d)(5)(v) and to change those forms in response to taxpayer feedback, if necessary, without needing to amend the regulations.

In light of the change to allow certain indirect partners to utilize modification under § 301.6225-2(d)(5), the final regulations under § 301.6225-2(d)(5)(v) provide that the IRS may require reporting to an indirect partner that is a qualified relevant partner through forms, instructions, or other guidance. This rule allows the IRS flexibility to evaluate and adapt reporting requirements concerning indirect partners as the IRS and partnerships gain more experience with the centralized partnership audit regime.

vii. Modification Relating to Qualified Investment Entities

Proposed § 301.6225-2(d)(7) provided that a partnership may request a modification of an imputed underpayment based on deficiency dividends distributed as described in section 860(f) by a relevant partner that is a qualified investment entity (QIE) under section 860(b). Under § 301.6225-2(c)(3)(i), the partnership must provide all information required to request modification (including modification for deficiency dividends paid by a QIE partner) on or before 270 days after the issuance of the NOPPA. A partnership may request an extension of this 270-day period, subject to the consent of the IRS. Section 301.6225-2(c)(3)(ii).

Several comments suggested that it is not ideal for a QIE partner to pay a deficiency dividend with respect to an amount or an adjustment that may not be final. The comments were specifically concerned that issues may be unresolved during the 270-day period after the issuance of the NOPPA because of possible review by IRS Appeals. The comments recommended that the IRS grant extensions of the 270-day period under § 301.6225-2(c)(3)(i) as a matter of course until all relevant issues concerning the adjustments have become final.

The IRS plans to adopt procedures under which the partnership will have an opportunity to resolve with IRS Appeals any issues with respect to the adjustments made during the examination prior to the mailing of the NOPPA. Therefore, all issues with respect to the adjustments will generally be resolved at the administrative level prior to the mailing of the NOPPA and the start of the 270-day modification period. Because a request for modification under § 301.6225-2(d)(7) will not be submitted until after the NOPPA has been mailed, the partnership and its QIE partners should know with certainty what adjustments are agreed and which are unagreed at the time of the modification request. This timing will allow the partnership and its QIE partners to evaluate the best method for modification and to determine whether modification under § 301.6225-2(d)(7) is appropriate. Accordingly, a rule requiring the granting of extensions of the 270-day period as a matter of course is not necessary.

Moreover, whether an extension of the modification period is appropriate is a determination best made on the facts and circumstances of a particular case. A rule requiring automatic granting of extensions would deprive the IRS of the ability to evaluation an extension request based on the facts and circumstances. Therefore, the final regulations do not require granting extensions of the 270-day period as a matter of course. Lastly, the regulations provide the IRS with the authority to grant an extension of the 270-day period when warranted, which also protects the partnership in cases that it may be initially unclear whether modification under § 301.6225-2(d)(7) is appropriate.

Another comment suggested that the regulations require payment of a deficiency dividend no later than 60 days after the date the partnership adjustments are finally determined, rather than after the NOPPA is mailed during the 270-day modification period. Another comment recommended that the regulations provide that the allowance of a deficiency dividend be agreed to in advance of a NOPPA, but in the event of a challenge to the underlying substantive adjustment in IRS Appeals or in court, the allowance does not become effective until final resolution of the underlying challenge. The final regulations do not adopt these suggestions.

First, as discussed earlier in this section of this preamble, the IRS Appeals process that the IRS intends to implement will already have determined which substantive adjustments are agreed to prior to the issuance of the NOPPA. As a result, the most likely avenue for a substantive challenge after modification will be in court and not with IRS Appeals.

Second, pursuant to section 6225(c)(7) and § 301.6225-2(c)(3)(i), everything required to submitted with respect to a modification request must be provided to the IRS within 270 days after the mailing of the NOPPA. The 270-day period is designed to ensure a timely resolution of the audit while also providing the partnership enough of an opportunity to modify an imputed underpayment reflected in a NOPPA. A rule allowing modifications after that 270-day period expires would undermine those goals.

Third, allowing modifications after the adjustments are finally determined precludes the IRS from approving modifications in the FPA. As discussed in section 3.B.ii of this preamble, the IRS plans to adopt procedures under which it will approve or deny each modification request in the FPA. Accordingly, the regulations do not permit modifications to be submitted beyond the 270-day period described in § 301.6225-2(c)(3)(i).

One comment recommended that the regulations clarify that a partnership's receipt of a NOPPA is not a “determination” that begins the 90- or 120-day period for a QIE partner's issuance and claiming of a deficiency dividend deduction under section 860. Section 860(e)(1)-(4) provides that a “determination” means (1) a court decision; (2) a closing agreement; (3) an agreement signed by the Secretary and by the QIE relating to the QIE liability for tax; or (4) a statement by the QIE attached to its amendment or supplement to a tax return. A NOPPA does not fall into any of these four categories. Accordingly, a NOPPA is not a “determination” for purposes of section 860(e). Moreover, § 301.6225-2(d)(7)(ii) requires that the partnership provide documentation of the QIE partner's “determination” described in section 860(e) as part of the partnership's request for modification. This rule makes clear that the determination in this context is the determination with respect to the QIE partner, which does not, by definition, include the NOPPA mailed to the partnership. Accordingly, because section 860(e), when read together with proposed § 301.6225-2(c)(7)(ii), addresses the comment's recommendation, the comment was not adopted.

viii. Closing Agreement Modification

Proposed § 301.6225-2(d)(8) provided that a partnership may request modification based on a closing agreement between the IRS and the partnership or between the IRS and a relevant partner, or both. One comment expressed concern that some partners might not want to negotiate the details of their tax return through the partnership representative and recommended that the regulations outline procedures for partners to work directly with the IRS to enter into closing agreements as part of the partnership audit. Although the IRS may, pursuant to § 301.6223-2(d)(1), allow a person that is not the partnership representative to participate in the examination of the partnership, the IRS is not required to do so. The centralized partnership audit regime is designed to provide for a single, unified proceeding in which the IRS works solely with the partnership representative who has the sole authority to bind the partnership and all its partners. Developing a regulatory procedure that would allow a single partner to work directly with the IRS, without working in conjunction with the partnership representative, during the partnership examination would contravene the regime's central design. The partnership representative may request that the IRS work directly with a partner on a closing agreement or other issues, but it is solely within the IRS's discretion to allow that. See § 301.6223-2(d)(1). Accordingly, this comment was not adopted.

ix. Requests for Additional Modifications

Section 6225(c)(6) provides that the “Secretary may by regulations or guidance provide for additional procedures to modify imputed underpayment amounts on the basis of such other factors as the Secretary determines are necessary or appropriate” for the purposes of section 6225(c). Proposed § 301.6225-2(d)(10) provided that a partnership may request a modification not otherwise described in § 301.6225-2(d), and the IRS will determine whether such modification is accurate and appropriate. Additional types of modifications and the documentation necessary to substantiate such modifications may be set forth in forms, instructions, or other guidance prescribed by the IRS.

Several comments recommended that the Treasury Department and the IRS exercise the authority under section 6225(c)(6) to expand the available types of modifications under proposed § 301.6225-2(d). One comment recommended additional modifications related to foreign partners, including a tax exemption based on section 892 and a reduction in taxes based on eligibility for reduced rates of withholding under a tax treaty. The comment further recommended that these types of modifications and modification for a tax exemption based on foreign status be verified using an expanded version of the existing Forms W-8 and W-9.

Former proposed § 301.6225-2(d)(3) provided rules regarding modifications with respect to adjustments allocable to partners that would not owe tax as a result of their status as a tax-exempt entity. Proposed § 301.6225-2(d)(3)(ii) defined tax-exempt entity to mean a person or entity defined in section 168(h)(2)(A), (C), or (D). A foreign person or entity as defined in section 168(h)(2)(C) includes a foreign government or foreign organization. Accordingly, to the extent an adjustment is allocable to a foreign government or foreign organization, the partnership may request modification with respect to such adjustment provided the requirements of § 301.6225-2(c) and (d)(3) are met.

Proposed § 301.6225-2(d)(9), added in the August 2018 NPRM, provided rules for tax treaty modifications. Under proposed § 301.6225-2(d)(9), a partnership may request modification with respect to a relevant partner's distributive share of an adjustment to a partnership-related item if the relevant partner was a foreign person who would have qualified, under an income tax treaty with the United States, for a reduction or exemption from tax with respect to such partnership-related item in the reviewed year, would have derived the item (within the meaning of § 1.894-1(d)) had it been taken into account properly in the partnership's reviewed year return, and is not otherwise prevented under the income tax treaty with the United States from claiming such reduction or exemption with respect to the reviewed year at the time of the modification request.

No comments were received on the tax treaty modification rules proposed in the August 2018 NPRM. Proposed § 301.6225-2(d)(9) is retained and simplified in the final regulations, with no change in substance. Accordingly, a treaty modification is only available to the extent the relevant partner would have qualified for the treaty benefit at issue, whether a rate reduction or exemption from tax, had the item been taken into account by the partner in the reviewed year. In general, that means a foreign partner may submit a treaty modification only if the partner was, for the reviewed year, a treaty resident; would have derived the item of income through the partnership, or tiers of partnerships, if applicable, under the tax laws of its country of residence; would have been the beneficial owner of the item of income (not a nominee or conduit); would have satisfied the limitation on benefits article under the treaty, if any; and met any other specific requirement for claiming the benefit under the treaty, such as a stock ownership threshold in the case of a claim for a reduced rate of tax on U.S. source dividends.

The final regulations do not address, however, which form will be used for tax treaty modification, or for any type of modification. Prescribing the specific form used for a specific type of modification in the regulations is generally not ideal for either taxpayers or the IRS. The IRS may determine in the future a different form is more appropriate or the form number or name may require revision. Having the flexibility to prescribe the form without needing to change the regulations saves government resources and allows for expedited guidance to taxpayers.

Another comment expressed concern that the determination of the imputed underpayment with respect to adjustments to CFTEs could result in an overpayment of taxes by partners under the centralized partnership audit regime to the extent that one or more partners would be eligible to take an additional foreign tax credit (FTC) as a result of any adjustments made following the conclusion of an audit. The comment recommended that taxpayers should be permitted to claim FTCs for which they are eligible, provided that the taxpayer can provide sufficient evidence to the IRS when claiming the credit. This comment was not adopted.

The modification procedures provide adequate opportunity for a partner to take advantage of any new FTCs. For example, the partners may use amended return modification or the alternative procedure to take into account all adjustments that might affect specific partners, including any new FTCs. Accordingly, no changes were made to the regulations in response to this comment.

Two comments requested that the Treasury Department and the IRS use the authority under section 6225(c)(6) to expand modification and to authorize an “Early Decision” procedure for pushing out audit adjustments in tiered structures in order to address the administrative concerns of the IRS related to a tiered push out. This comment, which was submitted prior to the amendments by the TTCA to section 6226(b) and the August 2018 NPRM, was not adopted. Under the rule proposed in the August 2018 NPRM, adjustments may be pushed out beyond the first tier of partners. See proposed § 301.6226-3(e) and section 4.C.iii. of this preamble for further discussion of the tiered push out rules.

One comment suggested that, to the extent an adjustment amount and the imputed underpayment with respect to that adjustment amount have already been reported and tax paid, modifications should be permitted with respect to the tax amount paid and not be limited only to taxes paid in connection with an amended return. The comment offered two examples which might result in an imputed underpayment being determined on tax that had already been paid. The first example would occur if partners file tax returns with inconsistent positions under section 6222 that reflect the income being adjusted in the examination. The second example presented by the comment is the situation in which two or more people may be deemed by the IRS to have formed a partnership when they have individually reported the income being ascribed to the deemed partnership. This comment was adopted. The final regulations under § 301.6225-2(d)(2)(ii) allow a partnership to satisfy the requirements of amended return modification by demonstrating that a partner previously took into account such partnership adjustments and their effect on tax attributes for all relevant years and made any necessary payments.

Similarly, one comment recommended that modification provide for an alternative to closing agreements that would allow the partnership to demonstrate that a partner's share of an adjustment was partially or fully reversed and so the imputed underpayment should therefore be reduced to give credit for taxes paid in a later year. For instance, the partnership could demonstrate that a former partner would have paid tax on capital gain on its partnership interest and that amount of gain would have, economically included the amount of an adjustment. The partnership would then, pursuant to this recommendation, be permitted to demonstrate that the imputed underpayment should be reduced by a refund in an intervening year.

The same comment also recommended that the final regulations adopt an additional modification type that would allow the partnership to demonstrate the impact of adjustments on one or more of its partners, specifically with respect to interest expense and foreign taxes paid. The comment recommended that the partnership be able to demonstrate that the partner's reporting of these items was not as beneficial as assumed in the calculation of the imputed underpayment.

These comments were received in response to the June 2017 NPRM. The August 2018 NPRM provided rules relating to the alternative procedure and also allowed for amended return modification without regard to sections 6501 and 6511. These additions in the August 2018 NPRM allow for the types of modifications the comment was recommending. For example, under amended return modification as revised in the August 2018 NRPM, a partner files amended returns for the first affected year and other years to the extent tax attributes in those years are affected by taking the adjustments into account. Whether the partner pays additional amounts, demonstrates that on net there is no tax due, or is entitled to a net refund, provided the partner has otherwise complied with the modification requirements, the imputed underpayment will be adjusted to remove that partner's share of the adjustments if the IRS approves the modification. Accordingly, the final regulations do not adopt these comments because the final regulations provide other methods for accomplishing the rules recommended by the comments.

One comment recommended that the final regulations expand modification procedures to allow modification based on closing agreements by and amongst the partnership and the relevant partners entered into in the course of a proceeding with the Competent Authority office, in particular to facilitate the implementation of any mutual agreement by the IRS in a manner that is consistent with the purpose of tax treaties to avoid double taxation. This modification might include mutual agreement procedures but may also include requests for assistance in the context of partner-level foreign tax credits and protective claims. The comment also recommended that the final regulations permit multiple closing agreements and provide procedures for cooperation between the Competent Authority and partnership examination teams. This comment was received in response to the June 2017 NPRM. The August 2018 NPRM provided for treaty modifications that were not in the former proposed regulations, and the final regulations maintain the added treaty modification procedure. The final regulations do not adopt any new modifications that were not previously proposed in the August 2018 NPRM, but maintain the modifications based on closing agreements and treaties. Nothing in the regulations limits the closing agreements in a way that would prevent a closing agreement, or multiple closing agreements, entered into during the Competent Authority process from being considered in the modification process.

C. Defenses to Penalties

Proposed § 301.6225-2(d)(2)(viii) provided that a relevant partner may raise a partner-level defense (as described in § 301.6226-3(d)(3)) by first paying the penalty, addition to tax, or additional amount with the amended return filed under § 301.6225-2(d)(2) and then filing a claim for refund in accordance with forms, instructions and other guidance. One comment recommended allowing the audited partnership to submit partner-level defenses for both direct and indirect partners as part of the modification process. According to the comment, a review by the IRS prior to requiring payment of the proposed penalties would permit an early determination regarding the validity of any partner-level defense and reduce economic and administrative burdens on taxpayers. The comment suggested that because penalties can represent a large dollar amount, the requirement that taxpayers must provide advance payment of penalties, even in cases where they have a valid penalty defense, can create a significant economic burden on partners. This comment was not adopted.

Due to the limited time the IRS has to review modification requests, the Treasury Department and IRS have determined that reviewing penalty defenses for specific partners in addition to reviewing the amounts taken into account on amended returns or in the alternative procedure submissions is unadministrable in the time frame allowed. The core aspect of the modification procedures is to exclude partnership adjustments from the imputed underpayment calculation. Whether a specific partner is then entitled to a refund of penalties paid after taking the adjustments into account is best determined outside the modification procedures and not subject to the time constraints of section 6225(c)(7) and § 301.6225-2(c). The final regulations, therefore, maintain the requirement that a partner must first pay any penalty due with the amended return filed during modification and then afterward file a claim for refund of the penalty in order to raise a partner-level defense. However, to address the concerns raised by the comment, the final regulations under § 301.6225-2(d)(2)(viii) give the IRS flexibility to develop through future guidance alternative procedures for raising partner-level defenses as the IRS gains more familiarity with the centralized partnership audit regime.

D. Adjustments That Do Not Result in an Imputed Underpayment

Proposed § 301.6225-3 addressed the treatment of adjustments that do not result in an imputed underpayment. Proposed § 301.6225-3 provided that a net negative adjustment resulting from a reallocation adjustment, which does not result in an imputed underpayment pursuant to § 301.6225-1(f), is taken into account by the partnership in the adjustment year as a separately stated item or a non-separately stated item, as required by section 702 and is allocated to adjustment year partners who are also reviewed year partners with respect to whom the amount was reallocated.

One comment expressed concerns with the application of proposed § 301.6225-3(b)(4) to publicly traded partnerships. According to this comment, the public trading of units of publicly traded partnerships depends on their fungibility, which requires that all items affecting the partners' section 704(b) capital accounts be allocated pro rata. The comment suggested that an allocation under proposed § 301.6225-3(b)(4) could force an adjustment year allocation to less than all of the public unit holders, potentially causing the units to be non-fungible. This comment was not adopted at this time, but the final regulations provide that the IRS may provide exceptions to the rule under § 301.6225-3(b)(4) pursuant to forms, instructions, and other guidance prescribed by the IRS. As the IRS gains more experience with the centralized partnership audit regime, the IRS may determine to create an exception through forms, instructions, or other guidance if doing so would benefit taxpayers while fulfilling the requirements of the statute and remaining administrable for the IRS. Having the flexibility to create such an exception through forms, instructions, and other guidance preserves government resources and expedites the process for the IRS to address taxpayer needs and for taxpayers to be aware of changes in IRS procedures.

One comment recommended that the regulations provide examples demonstrating the proper application of proposed § 301.6225-3(b)(4). The final regulations add two such examples under § 301.6225-3(d). One example demonstrates the application of the rule under § 301.6225-3(b)(4) in the context of a recharacterization adjustment the other example demonstrates application of the rule in the context of a reallocation adjustment.

One comment recommended that the rules be clarified regarding whether netting would be allowed with respect to adjustments that do not result in an imputed underpayment in multi-year audits. The comment asks about a particular example: If an audit of 2018 results in an imputed underpayment in 2018 and an overpayment in 2019 in regard to adjustment items, the proposed regulations would not permit those amounts to be netted. As discussed in section 3.A. of this preamble, partnership adjustments with respect to different reviewed years are not netted. If a multi-reviewed-year audit that resulted in an imputed underpayment with respect to one reviewed year and adjustments that do not result in an imputed underpayment with respect to a different reviewed year both had the same adjustment year, then the expense associated with the imputed underpayment paid in the adjustment year is taken into account by the partnership in the adjustment year and the adjustments that do not result in an imputed underpayment would also be taken into account on the adjustment year tax return. Expenses related to payment of an imputed underpayment are nondeductible under section 6241(4). As a result, such items would be taken into account according to subchapter K principles in the adjustment year and the extent to which any items net on the partnership or partners' returns would depend on the particular adjustments and the facts and circumstances of the partnership and partners. Instead, the partnership may also take advantage of modification procedures and the election under section 6226 to allow partnership adjustments to be taken into account directly by the partners that may, depending on the facts and circumstances, allow for different netting results at the partner level.

Lastly, § 301.6225-3(b)(7) was added to provide that partners that previously took into account an adjustment that does not result in an imputed underpayment before a notice of administrative proceeding was mailed by the IRS or before an administrative adjustment request was filed by the partnership do not take into account a second time the same adjustment that does not result in an imputed underpayment. This rule addresses situations where a partner took a position inconsistent with the partnership return as filed and as a result of that inconsistent position previously took into account items that were later determined by the IRS (or by the partnership in an AAR) to be adjustments that do not result in an imputed underpayment, such as additional losses or deductions. The rule is designed to ensure that such partners do not take the same items into account again in the adjustment year.

4. Election for Alternative to Payment of the Imputed Underpayment

Twenty-two comments were received concerning section 6226, the election for an alternative to payment of the imputed underpayment. This section of this Summary of Comments and Explanation of Revisions addresses comments concerning the mechanics and effect of making an election under proposed § 301.6226-1; the statements furnished to partners and filed with the IRS pursuant to proposed § 301.6226-2; and the rules regarding how adjustments are taken into account by partners in accordance with proposed § 301.6226-3. Comments concerning basis and tax attribute rules under proposed § 301.6226-4 will be addressed in future guidance.

A. Mechanics and Effect of Making an Election Under Section 6226

The comments received regarding the mechanics and effect of making an election under section 6226 cover six general topics: (1) The time for making the election; (2) revocations of the election; (3) making the election when there are multiple imputed underpayments or there is no imputed underpayment; (4) notification by the IRS that an election is invalid; (5) making the election and filing a petition for readjustment under section 6234; and (6) whether the election should be mandatory.

i. Time for Making the Election Under Section 6226

Under section 6226(a) and proposed § 301.6226-1(c)(3), a partnership may make an election under section 6226 (push out election) within 45 days of the date on which the FPA is mailed by the IRS. This 45-day period cannot be extended, and once made, the election may only be revoked with the consent of the IRS. See proposed § 301.6226-1(c)(1), (3).

Several comments recommended changes to the 45-day period under proposed § 301.6226-1(c)(3). Some comments suggested that the partnership should not be required to make the push out election until after there is a final determination of the partnership adjustments, either as a result of a defaulted FPA or, if a petition is filed, a final court decision. Other comments recommended that the regulations permit, either automatically or upon request, an extension of the 45-day period. These comments were not adopted.

The 45-day period for making an election under section 6226 is established by statute. Pursuant to section 6226(a)(1), section 6225 shall not apply to an imputed underpayment if the partnership “not later than 45 days after the date of the notice of final partnership adjustment” elects the application of section 6226 with respect to such imputed underpayment and furnishes statements to its partners for the reviewed year under section 6226(a)(2). The partners must then take into account the adjustments that resulted in that imputed underpayment. Consistent with section 6226(a)(1), proposed § 301.6226-1(c)(3) provided that an election under § 301.6226-1 must be filed within 45 days of the date the FPA is mailed by the IRS and that the time for filing such an election may not be extended.

Nothing in section 6226 provides for an exception to the 45-day period described in section 6226(a)(1), nor does section 6226 provide that the 45-day period may be extended by the IRS. Accordingly, comments suggesting that the regulations provide that a push out election may be made later than 45 days after the date of the FPA, whether as a general rule or as a result of an extension, were not adopted.

ii. Revocations of Elections Under Section 6226

One comment suggested that, as an alternative to delaying or extending the 45-day period for making the push out election, the regulations should provide that the IRS will liberally grant revocations of a push out election in certain circumstances, such as in the case of a settlement of an imputed underpayment. Another comment suggested that the regulations should provide that the IRS will approve any request to revoke an election upon completion of the administrative or judicial proceeding. These comments were not adopted.

Section 6226(a) provides that an election under section 6226, once made, “shall be revocable only with the consent of the Secretary.” Consistent with section 6226(a), § 301.6226-1(c)(1) provides that an election under § 301.6226-1 may only be revoked with the consent of the IRS. The requirement that a revocation only be made with the consent of the IRS is mandated by the statute and is critical to the administration of the collection aspect of the push out regime. A push out election relieves the partnership that made the election under section 6226 (audited partnership) from the requirement to pay the imputed underpayment to which the election relates and shifts the collection of any chapter 1 tax resulting from the partnership adjustment to the partners of the partnership. In light of the collection nature of the push out regime, whether a revocation of a push out election should be granted largely depends on the facts and circumstances. For example, a revocation may benefit the IRS, the partnership, and its partners in the case of an agreement by the partnership to pay at the partnership level in lieu of pushing out the adjustments to its partners. On the other hand, a revocation may prejudice the IRS and the partners if, for example, the revocation is granted after statements have already been furnished to the partners. In that case, some partners may have already paid any resulting tax. If the revocation is significantly delayed, some partners may be time-barred from filing refund claims. In turn, any refund claim filed by a partner would require additional processing by the IRS, which could become administratively burdensome particularly in the case of tiered structures. Also, the period to assess the imputed underpayment against the partnership may have expired at the time of the revocation request. Additionally, the audited partnership may no longer be collectible and, if the IRS granted a revocation, the IRS would be required to engage in unnecessary and costly additional collection procedures. Requiring consent of the IRS before a revocation takes effect ensures flexibility to appropriately address each circumstance and protects partners that may have already received pushed out statements. Accordingly, comments recommending liberal or automatic approvals of requests to revoke push out elections were not adopted.

iii. Making the Election When There Are Multiple Imputed Underpayments or When There Is No Imputed Underpayment

Under proposed § 301.6226-1(a), if an FPA includes more than one imputed underpayment (as described in proposed § 301.6225-1(g)), a partnership may make an election under § 301.6226-1 with respect to one or more of the imputed underpayments identified in the FPA. One comment suggested that the regulations clarify whether there are any requirements for, or limitations on, a partnership's ability to make a push out election for different imputed underpayments. Neither the proposed regulations nor the final regulations under § 301.6226-1(a) contain any restrictions or limitations on a partnership's ability to make an election under section 6226 for a particular imputed underpayment identified in an FPA. For each imputed underpayment for which the partnership plans to make a push out election, the partnership must satisfy the provisions of §§ 301.6226-1 and 301.6226-2, including the requirement under § 301.6226-1(c)(3)(ii)(D) that the election identify the imputed underpayment to which the election relates. Because the regulatory text does not suggest there are any restrictions on making a push out election with respect to different imputed underpayments, the comment seeking further clarification on this point was not adopted.

One comment suggested that a partnership should be allowed to make an election under section 6226 for a taxable year for which there is no imputed underpayment, but for which there is a tax effect favorable to the partnership. The comment described an example in which the IRS determines in an examination of year 1 that the partnership should have reported income originally reported in year 3 ratably over years 1, 2, and 3. In the example, the IRS determines an imputed underpayment with respect to year 1, and the partnership makes a push out election with respect to that imputed underpayment. The comment suggested that a push out election should be permitted for year 3 as well to correct the perceived anomalous result that could occur if the reviewed year partners did not get the benefit of the decrease in income with respect to year 3.

Pursuant to section 6226(a)(1), the partnership may make a push out election “with respect to an imputed underpayment.” Section 301.6226-1(a) echoes the statutory language by providing that a partnership may elect under § 301.6226-1 an alternative to the payment by the partnership of “an imputed underpayment.” Accordingly, to make a push out election under section 6226(a)(1) and § 301.6226-1, there must be at least one imputed underpayment for the taxable year. To the extent the comment was suggesting an election should be permitted for a year in which there is no imputed underpayment, the comment was not adopted.

As the comment observed, the partnership has other options to make adjustments for year 3. The partnership in the example could file an AAR for year 3, provided the period described in section 6227(c) permitted the filing of an AAR for year 3. See 6227(c) and § 301.6227-1(b). The modification procedures may also provide a mechanism for the partnership and its partners to benefit from the change to year 3. For example, the partners may file amended returns (or utilize the alternative procedure to filing amending returns) to take into account the adjustments to years 1, 2, and 3. See § 301.6225-2(d)(2). See also section 6225(c)(9) (allowing modification of adjustments that do not result in an imputed underpayment). Additionally, nothing in the final regulations prevents the partnership from seeking a closing agreement with the IRS with respect to year 3 subject to rules generally applicable to closing agreements.

iv. Notification That an Election Under Section 6226 Is Invalid

Under proposed § 301.6226-1(c)(1), an election under § 301.6226-1 is valid until the IRS determines that the election is invalid. If an election is determined by the IRS to be invalid, the IRS will notify the partnership and the partnership representative within 30 days of such determination and provide the reasons for the determination. See § 301.6226-1(d). Former proposed § 301.6226-1(c)(2) had provided that if the IRS makes a final determination that an election under § 301.6226-1 is invalid, section 6225 applies with respect to the imputed underpayment as if the election were never made and the partnership must pay the imputed underpayment. The word “final” was removed from former proposed § 301.6226-1(c)(2) in the August 2018 NPRM to clarify that the IRS may determine that an election is invalid, and assess and collect the imputed underpayment to which the purported election related, without first being required to make a proposed or initial determination of invalidity. This clarification was adopted in the final regulations under § 301.6226-1(d) (formerly proposed § 301.6226-1(c)(2)). Under § 301.6226-1(d), the IRS may determine an election is invalid without first notifying the partnership or providing the partnership an opportunity to correct any failures to satisfy all of the provisions of § 301.6226-1 and § 301.6226-2, including an opportunity to correct errors in pursuant to § 301.6226-2(d).

One comment suggested that the regulations require the IRS to notify the partnership of its intent to determine that a push out election is invalid and provide the partnership with an opportunity to respond prior to making a final determination that the election is invalid. This comment was not adopted.

An election under section 6226 may be invalid for a number of reasons and not every case will present a need to first communicate with the partnership. For example, the partnership may make an election, but never furnish statements to its partners. Providing the partnership with a preliminary determination that the election is invalid in that case and an additional opportunity to furnish statements would undermine the 60-day period for furnishing statements (see proposed § 301.6226-2(b)), which is designed to support the IRS's timely collection of any additional reporting year tax and provide timely information to reviewed year partners regarding any additional reporting year tax. In such a case, the IRS should have the ability to determine the election is invalid and to immediately assess an imputed underpayment without first notifying the partnership. Accordingly, the comment's suggestion was not adopted. However, while nothing in the regulations requires the IRS to first contact a partnership prior to making a determination that an election under section 6226 is invalid, the IRS intends to develop procedures under which the IRS will first contact partnerships prior to determining a push out election is invalid in certain cases. Those procedures, if adopted, will be set forth in future sub-regulatory guidance.

The same comment also suggested that the partnership should be able to seek review of a decision by the IRS that a push out election is invalid in the United States Tax Court. The United States Tax Court is a court of limited jurisdiction. See section 7442. The Treasury Department and the IRS do not have authority to confer jurisdiction on the United States Tax Court. Therefore, this comment was not adopted.

v. Effect of Filing a Petition for Readjustment Under Section 6226

Under proposed § 301.6226-1(e) (§ 301.6226-1(f) in the final regulations), a partnership that has made an election under § 301.6226-1 is not precluded from filing a petition under section 6234(a). Section 6234(a) provides that a partnership may file a petition in the Tax Court, a United States district court, or the Court of Federal Claims, within 90 days of the date on which an FPA is mailed under section 6231. A petition under section 6234 may be filed in a district court or the Court of Federal Claims only if the partnership filing the petition makes a jurisdictional deposit in accordance with section 6234(b). Proposed § 301.6234-1(b) provide that the jurisdictional deposit is the amount of (as of the date of the filing of the petition) any imputed underpayment (as shown on the FPA) and any penalties, additions to tax, and additional amounts with respect to such imputed underpayment.

One comment stated that the proposed regulations provide no explanation as to how or whether the deposit amount under section 6234(b) may or should be adjusted to reflect a push out election under section 6226. The comment recommended the regulations should provide a mechanism that would enable a partnership to file a petition in a district court or Court of Federal Claims and still make an election under section 6226, without creating the risk of having tax on the partnership adjustments paid twice. The comment suggested that one possible approach might be to reduce the deposit amount by the amount that would be reported by partners that receive push out statements. The comment suggested that another possible approach might be to ensure that there is a clear mechanism for the partnership to obtain a refund of the jurisdictional deposit before any amounts are paid under the push out by partners.

Nothing in the proposed regulations limits a partnership's ability to file a petition in a district court or the Court of Federal Claims if the partnership has made an election under section 6226 (provided the partnership has made the jurisdictional deposit required by section 6234(b)). Proposed § 301.6226-1(e) expressly provided that a partnership making the election under § 301.6226-1 is not precluded from filing a petition under section 6234(a) (which includes petitions in the Tax Court as well as petitions in district courts and the Court of Federal Claims). Accordingly, to the extent the comment was seeking clarification that a partnership can both make an election under section 6226 and file a petition under section 6234, the comment was not adopted because the plain language of § 301.6226-1(f) (proposed at § 301.6226-1(e) and renumbered to § 301.6226-1(f)) makes clear that a partnership can take both actions. Accordingly, no changes were made to proposed § 301.6226-1 in response to the comment. To the extent the comment was seeking to make clear that a partnership that makes a valid election under section 6226 with respect to an imputed underpayment is no longer liable for that imputed underpayment, the plain language of section 6226(a) and § 301.6226-1(b)(2) makes clear that is the case. The comment's suggestion regarding the amount of the jurisdictional deposit under section 6234(b) and proposed § 301.6234-1(b) is addressed in section 9 of this Summary of Comments and Explanation of Revisions.

vi. Elective Nature of Section 6226

One comment suggested that the regulations should make the election under section 6226 mandatory, unless provided for otherwise in the partnership agreement, in two circumstances in order to mitigate a partnership representative's potential conflict of interest and to provide protection to partners that are partners in the adjustment year but not partners in the reviewed year. The first circumstance is when the partnership representative is both a partner in the reviewed year and the adjustment year, and the partnership representative's interest during the adjustment year is less than it was in the reviewed year. The second circumstance is when the aggregate partnership interest of any adjustment year partner or group of partners holding a 20 percent or greater interest in the partnership is 20 percent or greater than the interest held by the same partner or group of partners in the reviewed year. Because the approach recommended by the comment is prohibited by statute, the comment's recommendation was not adopted.

Sections 6225 and 6226 provide that the default rule, absent an affirmative election by the partnership, is that the partnership shall pay any imputed underpayment resulting from the partnership adjustments. The regulations cannot switch the default rule from one that imposes partnership liability under section 6225 to one that requires a push out election under section 6226. Additionally, a partnership “elects the application of” section 6226 with respect to an imputed underpayment. Section 6226(a)(1). That election is statutory and, like under any other election under the Code, is a choice by the partnership. It would not be consistent with the elective nature of section 6226 to require the partnership to make a push out election under any circumstance.

vii. Election Must Include Address for Each Reviewed Year Partner

Proposed § 301.6226-1(c) required that an election under § 301.6226-1 must include each reviewed year partner's name, address, and TIN. Under § 301.6226-2(e), each statement furnished by the partnership to a reviewed year partner must include “the current or last address of the reviewed year partner that is known to the partnership.” A partnership should use the same standard for determining the address included for each reviewed year partner in the election under § 301.6226-1 as the address included in each statement under § 301.6226-2. Accordingly, the final regulations under § 301.6226-1(c) clarify that an election under § 301.6226-1 must include the “the current or last address of each reviewed year partner that is known to the partnership.”

B. Statements Furnished to Partners and Filed With the IRS

The comments received regarding furnishing statements to partners and filing the statements with the IRS cover five general areas: (1) The partners to whom the statements are furnished; (2) the timing of when the statements are furnished; (3) reasonable diligence in identifying correct addresses; (4) the effect of failing to properly furnish statements; and (5) the content of the statements.

i. Partners to Whom the Statements Are Furnished

Section 6226(a)(2) requires a partnership to furnish statements to “each partner of the partnership for the reviewed year.” Consistent with the statute, proposed § 301.6226-2(a) provided that a partnership that makes an election under § 301.6226-1 must furnish to each reviewed year partner a statement reflecting the partner's share of partnership adjustments associated with the imputed underpayment for which the election under § 301.6226-1 was made. A “reviewed year partner” is any person who held an interest in the partnership at any time during the reviewed year. See proposed § 301.6241-1(a)(9). One comment suggested that the partnership should only be required to furnish (or have the option to furnish) statements to partners that would owe additional tax as a result of the partnership adjustments. This comment was not adopted.

The statute does not impose any qualifications or limitations on which partners from the reviewed year must be furnished push out statements. The statute mandates that the partnership furnish a statement “to each partner of the partnership for the reviewed year.” Section 6226(a)(2). This statutory requirement is unambiguous and as a result is not being altered in the final regulations.

In addition, the collection mechanism of section 6226 is similar to tax reporting with respect to Schedules K-1, in that the partnership furnishes statements to the partners, and the partners are solely responsible for determining and self-reporting any tax due. Additionally, in most cases, the partnership will not know whether a reviewed year partner will owe additional tax for a particular year as a result of a push out election. Therefore, the partnership could not properly furnish statements without obtaining additional information about each partner's tax situation and determining to a high degree of certainty whether the information provided was accurate. Such an exercise would be burdensome for the partnership, potentially invasive to partners, and pose significant tax administration concerns. Furthermore, such a rule would require the IRS to know which partners would ultimately owe tax as a result of the election to evaluate whether the partnership properly furnished statements. While a partnership may know it is likely that a particular partner will owe additional tax under certain circumstances, crafting a general rule with those partnerships and circumstances in mind would be unfair to partnerships that lack such knowledge or have a means of obtaining it. In contrast, a rule requiring the partnership to furnish a statement to each reviewed year partner, regardless of whether that partner might owe tax as a result of the pushed out adjustments, is more administrable for the IRS, less burdensome to partnerships, and required by the statute.

The same comment also recommended that the regulations clarify how adjustments are communicated to reviewed year partners who dispose of their interest in the partnership, including persons who were partners in the reviewed year but not the adjustment year and persons who were only partners in the intervening years (the years after the reviewed year but before the adjustment year). Persons who were only partners in the intervening years are by definition not reviewed year partners, and therefore the partnership is not required to furnish statements to such partners under § 301.6226-2. As a result, partners that were only partners during intervening years are not required to take into account partnership adjustments under § 301.6226-3. Therefore, to the extent the comment was suggesting statements should be furnished to partners from intervening years only, this suggestion was not adopted.

Persons who were reviewed year partners, but who are not partners during the adjustment year or some or all of the intervening years, retain their status as reviewed year partners regardless of when they disposed of their interest. The partnership is required to furnish statements to its reviewed year partners in accordance with § 301.6226-2. Because the proposed regulations clearly required that statements be furnished to all reviewed year partners, no changes were made in response to this comment.

ii. Timing of When the Statements Are Furnished

Two comments were received regarding the timing of the statements furnished by a partnership to its reviewed year partners. The first comment suggested that the regulations should provide that a partnership will not be required to furnish statements under proposed § 301.6226-2 until after the partnership has exhausted its rights to challenge the audit adjustments through an administrative or judicial proceeding.

Under proposed § 301.6226-2(b)(1), a partnership that makes an election under § 301.6226-1 must furnish statements to its reviewed year partners (and file those statements with the IRS) no later than 60 days after the date all of the partnership adjustments to which the statement relates are finally determined. Partnership adjustments become finally determined upon the later of the expiration of the time to file a petition under section 6234 or, if a petition under section 6234 is filed, the date when the court's decision becomes final. Proposed § 301.6226-2(b)(1)(i), (ii). Once the time to file a petition has expired, or if a petition is filed, the court's decision has become final, the partnership has exhausted its ability to challenge the partnership adjustments through administrative and judicial avenues. Accordingly, because the plain language of proposed § 301.6226-2(b)(1) reflected the rule suggested by this comment, no changes were made in response to this comment.

The second comment suggested that the due date for the statements under proposed § 301.6226-2 should align with the due date for the partnership's Schedule K-1s and that extensions of the statement due date should be permitted to accommodate the complexity of the calculations necessary for the accurate distribution of the adjustments among the partners. The comment stated that not having the statement due date coincide with the Schedule K-1 due date would create confusion among the partners and likely result in less timely compliance. This comment was not adopted.

Under section 6226(a) and (b), each reviewed year partner that is furnished a statement takes into account the partnership adjustments reflected on that statement by adjusting the partner's chapter 1 tax for the taxable year which includes the date the statement was furnished by the partnership (the reporting year). Therefore, the date the statement is furnished by the audited partnership determines which taxable year a partner (either direct or indirect) will pay tax as a result of taking into account the partnership adjustments (the additional reporting year tax). For example, if a reviewed year partner is furnished a push out statement on March 15, 2022 with respect to reviewed year 2020, the partner must report and pay its additional reporting year tax on the partner's return for the 2022 taxable year, which, for individuals, would be considered timely filed on April 17, 2023 (April 15, 2023 is a Saturday). In contrast, when a partner receives a Schedule K-1, the partner is required to report the items on that Schedule K-1 on the tax return for the taxable year that has just ended. For example, if a partner receives a Schedule K-1 on March 15, 2022 for the 2021 taxable year, the partner must report the items on that Schedule K-1 on the partner's return for the 2021 taxable year, which, for individuals, would be due on April 15, 2022.

These examples illustrate the impediments to aligning the push out statement due date with the Schedule K-1 due date or with providing extensions of the statement due date. First, reviewed year partners who simultaneously receive both a push out statement and a Schedule K-1 may be required to report the items on those statements in different taxable years. While the receipt of tax documents at the same time of year might have some superficial appeal, there is a risk of causing confusion about when and how to take into account the information on those documents. For instance, receiving the push out statement at the same time as the Schedule K-1 could result in a belief by the partner that the partner is supposed to report the amounts on the push out statement in the same year as the items on the Schedule K-1, which would likely be incorrect. In addition, the reviewed year partners, to whom the push out statements must be furnished, may not be the same as the partners for whom Schedule K-1s are required. Therefore, requiring the statements to be furnished at or around the same time may also create confusion for the partnership.

Second, aligning the push out statement due date with the Schedule K-1 due date or allowing extensions would significantly delay the reporting and payment of the additional reporting year tax by reviewed year partners, which is contrary to the interests of sound tax administration. A delay in the reporting and payment of the additional reporting year tax would also increase the amount of interest partners would be liable for under section 6226(c). For example, if a reviewed year partner is furnished a push out statement on March 15, 2022 with respect to reviewed year 2020 under proposed § 301.6226-2 that statement reflects adjustments that were finally determined on or after January 15, 2022 (within the past 60 days). However, if instead the regulations provided that a statement may be furnished by the Schedule K-1 due date for the year in which the adjustments become finally determined (2022), the push out statement would not need to be furnished until March 15, 2023 (assuming no extensions). Under such a rule, the reviewed year partner would not be required to pay the additional reporting year tax until April 15, 2024, a full year after the partner would pay under the proposed regulations. See § 301.6226-3(b).

Accordingly, it is in the interests of sound tax administration to require the push out statements to be furnished expeditiously for all adjustments that are finally determined more than 60 days from the end of the calendar year because the additional reporting year tax is required to be paid with the return for the year in which the statement is furnished. This reporting and payment system also benefits partners by ensuring that reviewed year partners are furnished the push out statement close in time to the final determination of the partnership adjustments, allowing the reviewed year partners to determine any additional reporting year tax, effects on tax attributes, and make payments to stop interest from continuing to run.

For these reasons, the comment recommending alignment of the push out statement due date with the Schedule K-1 due date was not adopted. The recommendation that the push out statement due date be subject to extension also was not adopted for the reasons described in this section of this preamble.

In the case of a tiered structure, however, the comments' recommendation to align the push out statement due date with the Schedule K-1 due date is reflected in § 301.6226-3(e). Under § 301.6226-3(e)(3)(ii), pass-through partners must furnish statements to their affected partners no later than the extended due date for the return for the adjustment year of the audited partnership. This due date aligns the push out statements furnished by pass-through partners with the extended Schedule K-1 due date for the audited partnership, accommodating, in part, the comment's recommendation.

iii. Reasonable Diligence in Identifying Correct Address of Reviewed Year Partner

Under proposed § 301.6226-2(b)(2), a partnership must furnish statements to each reviewed year partner in accordance with the forms, instructions, and other guidance prescribed by the IRS. If the partnership mails the statement, the partnership must mail the statement to the current or last address of the reviewed year partner that is known to the partnership. If a statement is returned as undeliverable, the partnership must undertake reasonable diligence to identify a correct address for the reviewed year partner to which the statement relates. Proposed § 301.6226-2(b)(2).

One comment suggested the final regulations clarify that a master limited partnership (a publicly traded partnership as defined in section 7704) satisfies the reasonable diligence requirement under proposed § 301.6226-2(b) if the partnership utilizes the same procedures it uses for undeliverable Schedule K-1s. According to the comment, a master limited partnership (MLP) normally sends the Schedule K-1 to the address provided to the MLP by the partner's broker; MLPs provide call centers and web-based support that allow partners to directly provide updated contact information to the partnership; and MLPs typically do not attempt to update partners' addresses by using public name and address databases, but will update an address if mail is returned with a forwarding address.

The regulations under the centralized partnership regime are rules of general applicability for all partnerships. The procedure suggested by the comment would be cost-prohibitive for many partnerships. The Treasury Department and the IRS decline to provide a safe harbor in the final regulations solely for partnerships with the means to operate a call center. Additionally, it is not administrable to create special rules for different categories of partnerships as this would result in a multitude of special rules that in some cases may be contradictory and under inclusive. It may also create additional burdens for partnerships that cannot comply with a general rule designed with only a specific type of partnership in mind.

As the IRS gains experience with the centralized partnership audit regime and the push out election in particular, the Treasury Department and the IRS may consider whether further guidance regarding reasonable diligence would be beneficial for partnerships. For purposes of the final regulations, however, the comment's suggestion was not adopted, and the final regulations maintain the rule that the partnership undertake reasonable diligence when a statement is returned undeliverable.

In addition, the final regulations under § 301.6226-2(b)(2) clarify that if after undertaking reasonable diligence the partnership identifies a correct address for the reviewed year partner, the partnership must mail the statement to the reviewed year partner at that correct address.

iv. Effect of Failing To Properly Furnish Statements

Several comments suggested that the regulations clarify the effect of a partnership's failure to properly furnish statements under § 301.6226-2 has on the validity of an election under section 6226. One comment recommended clarification of whether a failure to undertake reasonable diligence under proposed § 301.6226-2(b)(2) with respect to a single partner would make the entire election under section 6226 invalid or only the portion allocable to that specific partner. Similarly, another comment recommended that the regulations clarify that a failure to furnish the statement to one partner would mean the push out election was still effective with respect to the other reviewed year partners, but that the partnership would be liable for the tax attributable to the partner who was not properly furnished a statement.

Pursuant to section 6226(a)(1), an election under section 6226 is made “with respect to an imputed underpayment.” Section 6226(a)(2) requires a partnership to furnish statements to “each partner” of the partnership for the reviewed year. Accordingly, the IRS may invalidate an election under section 6226(a) for any failure to meet the requirements of § 301.6226-1, regarding how an election must be made, or § 301.6226-2, regarding the manner in which statements must be furnished. Because an election under section 6226(a) is “with respect to an imputed underpayment” and not with respect to each specific partnership adjustment that resulted in that imputed underpayment, an election under section 6226 is either valid or invalid with respect to the entire imputed underpayment for which the election was purportedly made.

Nothing in the regulations, however, requires the IRS to determine that a purported election under section 6226 is invalid in situations where the partnership fails to fully comply with § 301.6226-1 or § 301.6226-2. To the contrary, pursuant to § 301.6226-1(c)(1), a push out election is valid unless and until the IRS determines that the election is invalid. Accordingly, if a partnership makes an election under § 301.6226-1 and furnishes statements to 99 out of 100 reviewed year partners, the partnership's push out election is valid unless and until the IRS determines the election is invalid.

Several comments suggested that the regulations provide a safe harbor that would satisfy the requirement to furnish statements to all reviewed year partners. Two comments suggested that the regulations adopt a de minimis rule providing that a failure to deliver a certain number of push out statements, or statements representing a de minimis amount of the pushed out adjustments, would not invalidate a partnership's election under section 6226. One comment recommended that the regulations provide that a partnership's push out election will not be invalidated if the partnership has substantially complied with the regulatory requirements. Another comment suggested that the regulations provide that a partnership will be deemed to have made a valid election under section 6226 if the partnership makes a good faith effort to furnish push out statements to all of its partners. Another comment recommended that the regulations clarify that the obligation to furnish a statement to each reviewed year partner is deemed satisfied if the partnership in good faith furnishes a statement to each partner to whom it was required to send a Schedule K-1 for the reviewed year. These comments were not adopted.

As an initial matter, proposed § 301.6226-2 did not require that the statements be delivered in order for the partnership's election under section 6226 to be valid. Rather, proposed § 301.6226-2(b)(2) required the partnership to furnish statements to partners in accordance with forms, instructions, and other guidance; mail the statements to the current or last address of the partner that is known to the partnership, and undertake reasonable diligence to identify a correct address for any returned statement. Compliance with the regulations does not require actual delivery, which is illustrated by proposed § 301.6226-2(b)(3), Example 1.

With respect to the suggestion that the regulations adopt a de minimis, substantial compliance, or good faith rule for failure to properly furnish statements to partners, these suggestions were not adopted. The push out regime is a collection mechanism in lieu of collecting the imputed underpayment from the audited partnership. The benefit to the audited partnership by making a push out election is that the partnership is no longer liable for the imputed underpayment to which the election relates. One of the requirements to obtain this benefit is that the partnership must furnish correct statements to all of the partnership's reviewed year partners. Until the statements have been furnished and the partners determine their additional reporting year tax, the tax implications for each partner as a result of taking into account the pushed out adjustments is uncertain. The additional reporting year tax for each partner may differ greatly, ranging from an increase in tax, a decrease in tax, or no liability at all.

None of the rules suggested by the comments—de minimis safe harbor, substantial compliance, good faith standard—takes into account the asymmetric tax consequences of the pushed out adjustments in the hands of the partners. For instance, a large percentage of adjustments may be allocated to one or a few partners and a failure to furnish statements to this de minimis number of partners would impede the proper collection of a large percentage of additional reporting year tax. Similarly, relatively small numerical adjustments may have significant tax effects on partners. A de minimis rule, whether based on the number of statements or amount of adjustments, would frustrate the collection aspect of section 6226. Additionally, a de minimis rule would present tax administration challenges because a partnership can pick and choose which statements to furnish to which partners, so long as the number of statements furnished or the amount of the pushed out adjustments fell within the de minimis amount. Good faith and substantial compliance rules present the same concerns.

Other provisions in the regulations mitigate against the concerns expressed by the comments. As previously discussed in this section of this preamble, under § 301.6226-2(b)(2) a partnership must send a push out statement to the current or last address of the partner that is known to the partnership. Doing so is generally sufficient for purposes of satisfying the address requirements of § 301.6226-2. Additionally, the general versus specific imputed underpayment rules also mitigate concerns about being unable to properly furnish a statement to a particular partner or group of partners. The partnership may request that the IRS designate a specific imputed underpayment with respect to the adjustments allocable to a partner or group of partners if the partnership has concerns about furnishing a statement to that partner or group of partners. See proposed § 301.6225-2(d)(6). For example, if the partnership lacks current address information for a specific partner, the partnership may request a specific imputed underpayment for that partner's share of the adjustments, pay the specific imputed underpayment, and make a push out election for the general imputed underpayment.

Two comments expressed concerns about situations when the partner no longer exists or is deceased or when the partnership does not have current contact information for a former partner. One of these comments suggested that once a partnership has furnished statements to its partners and to the IRS, the partnership has fulfilled its obligations under section 6226. The other comment specifically stated that neither the partnership nor the remaining partners should have any liability for the imputed underpayment or associated interest and penalties with respect to adjustments allocable to partners that are no longer in existence or who are deceased.

Nothing in the statute or the proposed regulations provides that the partnership or any remaining partners are liable for any amounts that are allocable to reviewed year partners who are no longer in existence or are deceased. Under section 6226(a) and proposed § 301.6226-1, there are only two requirements for a partnership to make an election under section 6226. One, the partnership must make an election under section 6226(a)(1) and § 301.6226-1 within 45 days of the date the FPA is mailed by the IRS. Two, the partnership must furnish statements to each partner from the reviewed year in the time and manner prescribed by § 301.6226-2. The plain language of proposed § 301.6226-1(c)(1) made clear that if a valid election is made under § 301.6226-1, the partnership is not liable for the imputed underpayment to which the election applies. Additionally, under proposed § 301.6226-2(f), only a partner's allocable share of the partnership adjustments are included on the statement furnished to that reviewed year partner. Pursuant to § 301.6226-3, only the adjustments reflected on the statement furnished to the reviewed year partner must be taken into account by that partner. To the extent the comment expressed concern about the partnership lacking a current address for a partner that no longer exists, is deceased or is otherwise a former partner, the proposed regulations provide that the partnership may furnish statements to the last address known to the partnership. Only if the statements are returned as undeliverable is the partnership required to undertake reasonable diligence to ascertain a current address. Accordingly, no revisions to the final regulations were made in response to this comment.

v. Corrections of Errors in Statements

As discussed in section 4.B.iv. of this preamble, several comments expressed concerns about the requirement to furnish statements to all of the partnership's reviewed year partners. Although those comments were not adopted, the ability to correct errors in statements mitigates the potential effects of this rule. Proposed § 301.6226-2(e) provided that the partnership must provide correct information in the statements it furnishes to its partners and files with the IRS. Proposed § 301.6226-2(d)(2)(i) provided that if a partnership discovers an error in a statement within 60 days of the statement due date, the partnership must correct that error, and may do so without IRS consent. If a partnership discovers an error more than 60 days after the statement due date, the partnership may only correct the error after receiving IRS consent. Proposed § 301.6226-2(d)(2)(ii). Additionally, when the IRS discovers an error in a statement, the IRS may require the partnership to correct that error or to provide additional information. Proposed § 301.6226-2(d)(3).

The correction rules under proposed § 301.6226-2(d) were designed to require a partnership that identifies an error in a statement to correct that error expeditiously. Similarly, nothing in the regulations prevents a partner that receives a statement containing an error from alerting the partnership of the error within the 60-day period so that the audited partnership can correct the error. Even if the partnership corrects errors within the 60-day period, however, proposed § 301.6226-1(c)(2) provided the IRS could invalidate the election.

In light of the comments in section 4.B.iv of this preamble regarding the effect on the push out election of failures to furnish correct statements, the Treasury Department and the IRS have revised the rule under proposed § 301.6226-1(c)(2). The 60-day correction period should serve as a period of time after the statements are furnished to verify that the information on the statements was correct and to rectify any errors without adverse consequences regarding the push out election to the partnership or its partners. The ability to correct statements gives the partnership an opportunity to ensure statements were furnished properly and, to the extent a correction can cure the identified defects, to take steps to ensure that an election under section 6226 will not be invalidated. The ability to correct errors also ensures that partners have the correct information when the partners take into account the adjustments reflected on the statements.

Accordingly, the final regulations under § 301.6226-1(d) clarify that the IRS may not invalidate an election based on errors that are timely corrected by the partnership in accordance with § 301.6226-2(d). However, any errors in any statements furnished by the partnership are subject to penalty under section 6722 and the regulations thereunder. See § 301.6226-2(a). In the case of errors discovered by the IRS, the IRS is under no obligation to require the partnership to provide additional information or to correct any errors discovered or brought to the IRS's attention at any time. The IRS may, instead, invalidate the election.

One comment recommended changes to the correction process under § 301.6226-2(d) and the timing of the correction period. Specifically, the comment suggested with respect to errors discovered by a partnership, the partnership should have an automatic obligation and right to issue corrected statements for errors discovered no later than 60 days after the extended due date of the audited partnership's adjustment year return. The comment also suggested that for errors discovered by the partnership after this date, the partnership must notify the IRS, and unless the IRS objects within 90 days of such notification, the partnership must issue the corrected statements. The comment suggested that if the IRS issues a denial within the 90-day period, such denial shall include an explanation for the denial, and the partnership shall have the ability to challenge the decision with IRS Appeals. These suggestions were not adopted.

It is not in the interest of sound tax administration to place a limit on the time the IRS has to consider whether to allow corrected statements after 60 days from the due date of the statements. For example, a partnership may request to make a correction at a time when the period of limitations on assessing additional tax for the affected partners was closed, but the period of limitations for requesting a refund as to other affected partners was still open. If the IRS was unable to process the request to issue corrected statements within 90 days, the corrected statements would be furnished to the partners and those partners would take into account the adjustments. If the IRS determines that the correction of the errors was insufficient, the IRS could determine the partnership's election under section 6226 was invalid, but the period of limitations on assessing the imputed underpayment may have expired by that time. By requiring IRS permission before any corrected statements are furnished, the IRS can evaluate each request based on the facts and circumstances and ensure that any proposed corrections are consistent with the determinations made during the partnership proceeding and would not frustrate the collection of any amounts owed as a result of the partnership proceeding. Requiring IRS permission also incentivizes partnerships to submit correct statements by the due date, which ensures that partners are provided timely and accurate information with which to take into account the adjustments. Because partners may have already taken into account the adjustments, any corrections received by the partners after they have taken into account the adjustments could detrimentally affect those partners.

The same comment also suggested that with respect to errors discovered by the IRS, the IRS may not unreasonably refuse to permit a partnership to issue corrected statements if correction of the error results in a reduced tax liability by the affected partners or to correct the allocation of an adjustment between partners. This comment was not adopted. To extent this comment was suggesting that the regulations require the IRS to require the partnership to correct errors the IRS discovers in these circumstances, the comment was not adopted. The IRS needs discretion to evaluate whether requiring the correction of errors is in the interest of sound tax administration. For example, the errors may be de minimis or the correction of the errors may result in barred assessments or require partners to file amended returns if they have already taken into account the adjustments. To the extent the comment was suggesting that the IRS should not unreasonably withhold consent in situations where the partnership has discovered errors, the comment was also not adopted. As stated earlier in this section of this preamble, the IRS needs the flexibility to evaluate requested changes based on the facts and circumstance of each request.

vi. Contents of the Statements

Under proposed § 301.6226-2(e), each statement described in proposed § 301.6226-2 must include an enumerated list of items, including the partner's name and taxpayer identification number (TIN) and any other information required by forms, instructions, and other guidance prescribed by the IRS. Several comments suggested that the IRS assign a unique control number or other numerical code to a notice of final partnership adjustment and require that all push out statements with respect to an imputed underpayment reflected on that FPA include that control number. The IRS intends to adopt this suggestion by assigning a unique control number to each examination under the centralized partnership audit regime and by using that number for each form, letter, or other document used in the examination as well as any forms or statements utilized for a push out election. The final regulations, however, do not include the audit control number as an enumerated item under § 301.6226-2(e). Requiring the control number through the forms and instructions provides the IRS with the flexibility to gain experience with the use of a unique control number and to make changes, as necessary, without needing to amend the regulations. This flexibility preserves government resources and also expedites the process for taxpayers to be aware of changes in IRS procedures.

C. Adjustments Taken Into Account by Partners

The comments regarding how adjustments are taken into account by partners covered five general areas: (1) The calculation of the additional reporting year tax; (2) penalties, additions to tax, and additional amounts; (3) pass-through partners; (4) qualified investment entities and master limited partnerships (MLPs); and (5) the examples under proposed § 301.6226-3(h).

i. Calculation of the Additional Reporting Year Tax

Former proposed § 301.6226-3(a) provided that the chapter 1 tax for each reviewed year partner for the reporting year was increased by the additional reporting year tax, which was generally defined as the aggregate of the correction amounts determined under former proposed § 301.6226-3(b). Under former proposed § 301.6226-3(b), the aggregate of the correction amounts was determined by adding the amount by which a reviewed year partner's chapter 1 tax would have increased for the first affected year with the amount by which the partner's chapter 1 tax for any intervening year would have increased if the adjustments were taken into account in the first affected year. Because the rule did not account for any decrease in a reviewed year partner's tax for a taxable year, former proposed § 301.6226-3(b)(1) provided that a correction amount for any taxable year could not be less than zero and that any amount less than zero could not reduce any other correction amount.

Section 206(e) of the TTCA amended section 6226(b) to provide that, when a reviewed year partner takes into account the adjustments under section 6226(b), the partner's chapter 1 tax for the reporting year is adjusted by the amounts the partner's chapter 1 tax for the first affected year or any intervening year would increase or decrease if the partner's share of the adjustments were taken into account in the first affected year. The TTCA amendments to section 6226(b) were adopted in the August 2018 NPRM. Proposed § 301.6226-3(b), as revised in the August 2018 NPRM, provided that each reviewed year partner's chapter 1 tax for the reporting year is increased or decreased by the additional reporting year tax, as appropriate. Under proposed § 301.6226-3(b)(2) and (3), the correction amounts are the amounts by which the partner's chapter 1 tax would increase or decrease if the partner's taxable income for that year were recomputed by taking into account the partner's share of the partnership adjustments. Under proposed § 301.6226-3(b)(1), as revised, a correction amount for the first affected year or any intervening year may be less than zero, and any correction amount less than zero may reduce any other correction amount.

The final regulations under § 301.6226-3(b)(1) were further revised to provide that nothing in § 301.6226-3 entitles any partner to a refund of tax imposed by chapter 1 to which such partner is not entitled. This language clarifies that the rules under section 6226 and 6227 are consistent insofar as those rules concern the ability of a partner to claim a refund of an overpayment when taking into account partnership adjustments. See § 301.6227-3(b)(1). Whether an overpayment exists is determined by the Code and existing law outside the scope of these regulations. See section 5.D. of this preamble for further discussion.

Proposed § 301.6226-3(b)(2) and (3) provided that when computing a correction amount for the first affected year or any intervening year, partners should account for the amount of tax shown on an amended return for such year, “including an amended return filed, or alternative to an amended return submitted, under section 6225(c)(2) by a reviewed year partner.” The final regulations under § 301.6226-3(b)(2) and (3) remove the language referring to the alternative procedure for filing amended returns under section 6225(c)(2). Amounts assessed based on submissions under the alternative procedure more appropriately fall within the amounts described in § 301.6226-3(b)(2)(ii)(B) and (b)(3)(ii)(B). Accordingly, treating such amounts as akin to amounts shown on amended returns could have led to inaccurate correction amounts. As such, the final regulations under § 301.6226-3(b)(2)(ii)(B) and (b)(3)(ii)(B) have been revised to clarify that the amounts under those provisions include not only the amounts described in § 1.6664-2(d), but also any amounts not included on the return of a partner which are assessed against and collected from the partners. Such amounts include amounts paid as part of modification under § 301.6225-2, including under the alternative procedure or in accordance with a closing agreement. Such amounts do not include, however, any amounts paid with an amended return filed as part of modification because those amounts are included with the amounts shown on a return or amended return under § 301.6226-3(b)(2)(ii)(A) and (b)(3)(ii)(A).

Several comments received prior to the TTCA amendments recommended that the calculation of the additional reporting year tax under former proposed § 301.6226-3(b) be revised to account for potential decreases to a reviewed year partner's chapter 1 tax had the adjustments been taken into account. Certain comments stressed that it was critical for taxpayers to receive symmetrical treatment under section 6226 with respect to adjustments for overpayments or other adjustments that would serve to reduce the additional reporting year tax. One comment suggested that a decrease in tax in one year as a result of the adjustments should be able to reduce the additional tax payable with respect to any other taxable year. One comment specifically recommended that former proposed § 301.6226-3(b) be revised to provide that the correction amount for a partner is the amount by which the reviewed year partner's chapter 1 tax would increase or decrease for the first affected year and all intervening years.

The plain language of section 6226(b), as amended by the TTCA, and proposed § 301.6226-3(a) and (b), as revised in the August 2018 NPRM, make clear that any decreases in tax that result from taking into account the adjustments can produce a correction amount, and in turn an additional reporting year tax, that is less than zero. Accordingly, because the recommendations made by the comments were reflected in the proposed regulations, no changes were necessary in response to those comments.

Another comment recommended that the regulations clarify how information would be communicated to reviewed year partners to calculate a correction amount under section 6226(b)(2)(B) for an intervening year and suggested that partners calculate only the net increase in tax in each intervening year. The comment described an example of an adjustment that results from timing differences and recommended that the push out statement include the beneficial effect of deductions, if any, in subsequent years.

Consistent with section 6226(b)(2)(B), proposed § 301.6226-3(b)(3) provided that a correction amount for an intervening year is the amount the partner's chapter 1 tax for such year would increase or decrease after taking into account any adjustments to tax attributes that resulted from taking into account the partnership adjustments in the first affected year. Accordingly, in order to determine an intervening year correction amount, the partner needs to know the partnership adjustments for the reviewed year, which is information provided on the push out statement furnished to the partner. See § 301.6226-2(e). No changes were made to the regulation to respond to the comment's request for clarification on this point. Regarding the comment's suggestion that the correction amount for any intervening year be calculated by reference to the partner's net increase in tax, the rule under § 301.6226-3(b)(3) accommodates this suggestion because it accounts for both increases and decreases that would have occurred in an intervening year. Therefore, no changes were made to the regulations in response to this suggestion.

The comment also recommended that the regulations provide that each partner calculates the correction amounts as though drafting an amended return and that such calculation should be based on generally applicable rules under the Code. The plain language of proposed § 301.6226-3(b)(2) and (3) provided precise rules for calculating the correction amounts. Those rules are consistent with how underpayments and overpayments are generally calculated elsewhere in the Code and regulations and thus provide for the method the comment recommended. See, for example, § 1.6664-2. Forms and instructions will provide additional guidance for partners in computing correction amounts and the additional reporting year tax. Providing this additional guidance through forms and instructions allows for both the IRS and taxpayers to gain experience with those documents and to recommend and to make changes, as necessary and appropriate, without needing to amend the regulations. This informal guidance process preserves government resources and expedites the process by which the IRS can respond to taxpayer needs and by which taxpayers are made aware of changes in IRS procedures. Accordingly, no changes were made to the regulations in response to this comment.

Two comments observed that an audit under the centralized partnership audit regime may be concluded after the statute of limitations for amending partner returns has expired. The comments recommended that the statute of limitations should be automatically extended to allow partners time to file an amended return and claim a refund.

To the extent these comments were concerned about the inability to benefit from any decreases in tax that would have resulted from taking into account the adjustments under section 6226(b), those concerns are addressed by proposed § 301.6226-3(b) as revised in the August 2018 NPRM. As discussed earlier in this section of this preamble, the plain language of § 301.6226-3(b) allows partners to account for increases and decreases that would have resulted in the first affected year or any intervening year were the adjustments taken into account in those years.

To the extent the comment was addressing seeking refunds via amended returns outside the push out process, § 301.6225-2(d)(2) allows for modification of the imputed underpayment via partner amended returns for taxable years for which the period of limitations would otherwise be expired. See section 6225(c)(2)(D). To the extent the comment was seeking a mandatory extension of all partner (direct and indirect) statutes of limitation to file amended returns and claim a refund, it is not in the interests of sound tax administration to provide for automatic extensions where other mechanisms provide adequate remedies for taxpayers. Under both the push out process and the amended return modification procedures, partners may benefit from decreases in tax that result from partnership adjustments. Creating an additional automatic extension process to achieve the same results potentially leads to more administrative burden for the IRS without any tangible benefit for partners. Accordingly, the comments' recommendation for automatic extensions in order to file refund claims was not adopted.

Two comments suggested that the final regulations clarify whether a partner must calculate and pay any additional taxes due under chapters 2 and 2A of the Code when taking into account adjustments under section 6226(b). One comment specifically asked about the application of chapters 2 and 2A in the context of an election by the taxpayer to pay the safe harbor amount. Another comment asked about the consequences of failing to pay chapter 2 or 2A tax if the regulations imposed such a requirement.

First, regarding the comment specific to the safe harbor amount, the safe harbor amount was removed from the regulations in the December 2017 NPRM, no comments were received regarding its removal, and the final regulations do not include a safe harbor amount. Accordingly, inasmuch as this comment was concerned about the safe harbor amount, this comment was not adopted.

Regarding the other comments, section 6226(b)(1) provides that each partner's “tax imposed by chapter 1” shall be adjusted by the aggregate of the correction amounts determined under section 6226(b)(2). Both section 6226(b)(2)(A) and (B) describe the correction amounts as amounts by which the partner's “tax imposed under chapter 1” would increase if the partner's share of the adjustments were taken into account. Consistent with section 6226(b), proposed § 301.6226-3(b) provided that each partner's chapter 1 tax for the reporting year is increased or decreased by the amounts by which the partner's chapter 1 tax would increase or decrease were the adjustments taken into account. The plain language of the statute and the proposed regulations makes clear that a reviewed year partner only increases its chapter 1 reporting year tax by the aggregate of the correction amounts, which are calculated by reference to the amounts by which the partner's chapter 1 tax would increase or decrease for the first affected year or any intervening year. Therefore, no changes were made to § 301.6226-3(b) in response to this comment. Furthermore, because the regulations do not require payment of chapter 2 or 2A taxes when a partner takes into account adjustments under section 6226(b), the consequences of failing to pay those taxes is beyond the scope of the regulations.

ii. Penalties, Additions to Tax, and Additional Amounts

Former proposed § 301.6226-3(a) provided that a reviewed year partner must pay the partner's share of any penalties, additions to tax, or additional amounts determined at the partnership level reflected on the statement furnished to the partner under § 301.6226-2. See former proposed § 301.6226-2(e)(7) and (f)(3). Example 1 in former proposed § 301.6226-3(g) illustrated the application of this rule. In the example, the IRS determines an imputed underpayment and a related accuracy-related penalty in the amount of $32. The partnership elects the application of section 6226 with respect to the imputed underpayment and furnishes a statement to partner A, a 25 percent partner, reflecting A's share of the adjustments and A's share of the $32 penalty amount ($8). The example concludes that A must pay its $8 share of the penalty with its reporting year return.

One comment expressed concern with Example 1 under former proposed § 301.6226-3(g), particularly the result that a partner pays a penalty amount based on the amount of the partnership's imputed underpayment, rather than the amount of the partner's increased tax liability. The comment recommended the regulations clarify that penalties are not measured by reference to the imputed underpayment amount determined at the partnership level.

This comment was addressed by proposed § 301.6226-3(d), as revised in the December 2017 NPRM. As revised, proposed § 301.6226-3(d)(2) provided that a reviewed year partner calculates the amount of any penalty, addition to tax, or additional amount at the partner level by treating a correction amount determined under § 301.6226-3(b) as if it were an underpayment or understatement for the first affected year or intervening year, as applicable. If, after taking into account the partnership adjustments, the reviewed year partner did not have an underpayment, or had an underpayment that fell below the applicable threshold for the imposition of a penalty, no penalty would be due from the reviewed year partner. Proposed § 301.6226-3(d)(2). Accordingly, the proposed regulations make clear that a partner's penalty is not based on the imputed underpayment amount determined at the partnership level, as recommended by the comment. Example 1 under § 301.6226-3(h) was also revised to account for this rule change.

I. Penalty Defenses

Former proposed § 301.6221(a)-1(c) had provided that any defense to any penalty, addition to tax, or additional amount must be raised by the partnership in the partnership-level proceeding, regardless of whether the defense was based on facts and circumstances relating to a person other than the partnership. As discussed in section 1.A of this preamble, former proposed § 301.6221(a)-1(c) was removed from the regulations in the December 2017 NPRM. As part of the revisions in the December 2017 NPRM, the regulations under section 6226 (former proposed § 301.6226-3(i)) were also revised to provide that the calculation of the partner's penalty amount in the case of a push out election is based on the characteristics of, and facts and circumstances applicable to, the reviewed year partner. In addition, a reviewed year partner claiming that a penalty, addition to tax, or additional amount is not due because of a partner-level defense may raise that defense, but must first pay the penalty and file a claim for refund for the reporting year. See proposed § 301.6226-3(d)(3), as revised in the August 2018 NPRM.

One comment recommended that the regulations clarify that a partnership that makes a push-out election will be able to avail itself of partner-level defenses at the partnership level. For the reasons discussed in section 8.A. of this preamble, this comment was not adopted. Under § 301.6233(a)-1(c)(1), a partner-level defense may not be raised in a proceeding of the partnership, including a partnership that makes an election under section 6226, except as otherwise provided in guidance prescribed by the IRS.

Two other comments recommended that the regulations should provide a mechanism for partners to raise partner-level defenses prior to assessment, rather than requiring the partner to first pay the penalty and then file a claim for refund to raise the partner-level defense. One comment specifically suggested that a partner could raise a partner-level defense in the push out context by submitting a statement supporting that defense with the partner's reporting year return. This comment further suggested that the requirement to pre-pay penalties is contrary to the procedures in place for similar scenarios involving amended returns and audit adjustments. These comments were not adopted.

First, to the extent the comment addresses procedures for amended returns and audit adjustments other than partnership adjustments, those procedures are beyond the scope of these regulations. The centralized partnership audit regime is a new set of procedures that does not have an existing parallel in other areas of procedural tax law, and, as such, other scenarios involving amended returns and audit adjustments are not sufficiently similar to provide a relevant baseline against which to determine how the centralized partnership audit procedures should be developed.

Second, under the centralized partnership audit regime, the applicability of penalties, additions to tax, and additional amounts that relate to partnership adjustments is determined at the partnership level. Section 6221(a). A push out statement furnished to a partner under § 301.6226-2 will include any penalties, additions to tax, or additional amounts determined at the partnership level that are applicable to the adjustments pushed out to that partner. The applicability of such penalties, additions to tax, and additional amounts as set forth in the push out statement furnished to the partner are binding on the partner pursuant to section 6223. See § 301.6226-1(e). Therefore, when taking into account the pushed out adjustments, the applicability of any penalties related to those adjustments has already been determined. The imposition and amount of the penalty is determined only upon the partner calculating the additional reporting year tax (or imputed underpayment in the case of pass-through partners) and applying any relevant threshold amounts.

Because the IRS has already determined that a penalty applies, it is contrary to the interests of sound tax administration to allow partners to argue they are not liable for the penalty based on partner-specific reasons without first requiring payment of the penalty. Allowing a partner to raise a partner-level defense without prepaying the penalty would require the IRS to check each reviewed year partner's return to see if a penalty defense was properly raised and open up an examination of the partner to determine the validity of the defense. Such a process would frustrate the collection of the penalties, the applicability of which was already determined at the partnership level in an examination. Requiring pre-payment of penalties before defenses are raised ensures that partners raise only colorable penalty defense claims. For those that do not have such claims, it will ensure immediate collection of the appropriate amount of penalties.

One comment observed that, as a practical matter, it is unclear how a limited partner would dispute penalties determined at the partnership level, particularly because the partner may have no or limited information of actions at the partnership level or control over such actions even if known. The comment recommended clarifying what constitutes reasonable cause or good faith under circumstances that will be common among partnerships with limited partners.

Proposed § 301.6226-3(d)(3) defined partner-level defenses as those defenses that are personal to the reviewed year partner and based on the facts and circumstances applicable to that partner (for example, a reasonable cause and good faith defense under section 6664(c) based on facts specific to a particular partner). Limited partners will have an opportunity to raise defenses specific to their facts and circumstances. The partners (limited partner or otherwise) should have all of the information needed to adequately raise a partner-level defense because that defense is based on the facts and circumstances applicable to the specific partner raising the defense. The partner does not need new information regarding partnership-level actions or control over partnership-level information that the partner did not have access to at the time it took a position on its return reflecting the items from the partnership subject to penalty. The centralized partnership audit regime does not alter the existing law under the Code, regulations, or applicable case law relating to reasonable cause and good faith determinations. Furthermore, as discussed in section 8.A of the preamble, any defense that is based on the conduct or actions of the partnership is a partnership-level defense that must be raised by the partnership during the partnership proceeding. See proposed § 301.6233(a)-1(c)(2)(v).

II. Partnership Payment of Penalties on Behalf of Partners

One comment recommended that the partnership have the option of paying penalties at the partnership level while pushing out the partnership adjustments to its partners. The comment noted that pushing out penalties may require long and complex explanations regarding why the penalties apply, which could be burdensome to the partnership, partners, and the IRS, and may cause friction among the partners.

Section 6226(c)(1) provides that any penalties, additions to tax, or additional amounts shall be determined as provided under section 6221, and the partners of the partnership for the reviewed year shall be liable for any such penalty, addition to tax, or additional amount. If the partnership were to pay any penalties, additions to tax, or additional amounts in lieu of pushing out those amounts to its partners, the payment would be a payment towards the liability of the partners, not the partnership. The ability of a person to make a payment towards another's tax liability currently exists outside of the centralized partnership audit regime, and the regime does not alter or affect this ability. The partnership and its partners may enter into a business arrangement whereby the partnership makes a payment towards the partner's penalty liabilities, or whereby the partnership remits an amount to each partner to compensate for any potential penalties, additions to tax, or additional amounts. Nothing in the regulations under § 301.6226-3 would disturb those types of arrangements.

At the same time, the regulations do not provide a specific method for making such payments. Creating and monitoring a separate system to allow for partnerships to pay penalties on behalf of its partners would be burdensome for the IRS, partnerships, and partners. As discussed earlier in this section of the preamble, under proposed § 301.6226-3(d)(2) a partner's penalty amount is calculated based on the facts and circumstances unique to each partner. For the partnership to fully pay the amount of penalties owed by its partners, the partnership would need to obtain detailed information about each partner's personal tax situation, which is burdensome for the partnership and potentially invasive to the partners. This information would also have to be transmitted to the IRS to verify the correct penalty amount was paid and reflected in each partner's account. For these reasons, this comment was not adopted.

Another comment similarly suggested that the IRS create a process by which the partnership could pay both interest and penalties on behalf of its foreign partners so that those foreign partners would not need to obtain a TIN to file a U.S. tax return to report and pay interest and penalties. The comment suggested that the IRS could require, as part of that process, the partnership to obtain documentation from the foreign partner authorizing the partnership to make the payment on the foreign partner's behalf. The comment also recommended that the regulations make clear such a payment would not preclude the partnership from making a push out election with respect to the adjustments. This comment was not adopted.

As discussed earlier in this section of this preamble, there are administrative difficulties involved with adopting a specific method for a partnership to determine and pay over to the IRS its partners' amounts of penalties and interest. Further, because penalties and interest are determined at the partner level, a partnership will generally not be able to pay the exact amount of penalties and interest due with respect to each foreign partner. Therefore, there would be no basis for waiving the filing requirement for a foreign partner under these circumstances, even in cases in which the partnership is able to satisfy the tax due at source. For these reasons, the comment's suggestion was not adopted and no changes were made to the regulations in response to the comment.

III. Interest on Penalties, Additions to Tax, and Additional Amounts

Section 6226(c)(2) provides that in the case of a push out election, interest shall be determined at the partner level from the due date of the return for the taxable year to which the increase in chapter 1 tax is attributable. Proposed § 301.6226-3(c)(1) provided that interest on each correction amount greater than zero is calculated from the due date (without extension) of the reviewed year partner's return for the applicable taxable year until the amount is paid. For purposes of calculating interest on any penalties, additions to tax, or additional amounts, proposed § 301.6226-3(c)(2) similarly provided that such interest is calculated from the due date (without extension) of the reviewed year partner's return for the applicable taxable year until the amount is paid.

One comment observed that section 6226(c)(2) is silent as to whether the due date of the return for the purpose of calculating interest is determined with or without regard to any extension of time for filing, and noted that the statute does not differentiate between interest on tax and interest on penalties and additions to tax. The comment recommended the regulations adopt a bifurcated approach under which interest would run on the correction amounts from the due date of the return without regard to extensions while interest on penalties would run from the due date of the return including any extensions. The comment observed a similar bifurcated approach exists for calculating interest on tax and certain penalties outside the partnership context.

After consideration, the Treasury Department and the IRS have adopted this comment to be consistent with the method of calculating interest on penalties outside of the centralized partnership audit regime pursuant to section 6601(e)(2)(B). Accordingly, § 301.6226-3(c)(2) now provides that interest on any penalties, additions to tax, or additional amounts is calculated from the due date (including any extension) of the reviewed year partner's return for the applicable tax year until the amount is paid.

IV. Interest on the Additional Reporting Year Tax

Section 6226(c)(2) provides that interest in the case of a section 6226 election is determined at the partner level, from the due date of the return for the taxable year to which the increase in chapter 1 tax is attributable, and at the underpayment rate under section 6621(a)(2) (substituting 5 percent for 3 percent). As explained in section 4.A of the preamble to the August 2018 NPRM, while the TTCA amended section 6226(b) to provide that both increases and decreases in chapter 1 tax are used in computing a partner's additional reporting year tax, the TTCA did not similarly amend the reference to “increases” in section 6226(c)(2). The result of the changes to section 6226 is that interest only applies to the increases in the chapter 1 tax that would have resulted from taking into account the partnership adjustments under section 6226. No provision under the centralized partnership audit regime provides for interest on a decrease in chapter 1 tax that would have resulted in the first affected year or any intervening year if the adjustments were taken into account in those years. Accordingly, proposed § 301.6226-3(c)(1) provided that interest on the correction amounts determined under proposed § 301.6226-3(b) is only calculated for taxable years for which there is a correction amount greater than zero, that is, taxable years for which there would have been an increase in chapter 1 tax if the adjustments were taken into account.

One comment suggested that the final regulations clarify that the IRS will pay interest on any refunds issued on prior overpayments resulting from a taxpayer's statements filed under section 6226 with their reporting year return. The comment expressed the belief that the rule under section 6226(c)(2) is only intended to increase the normal statutory rate of interest imposed, not to exclude interest on overpayments.

The additional reporting year tax is calculated under section 6226(b)(2) by reference to the amount that a partner's chapter 1 tax “would” increase or decrease if the partner's share of adjustments “were taken into account” in the first affected year or in the case of an intervening year, the amount by which such tax would increase or decrease by reason of the adjustment to tax attributes. An adjustment to a tax attribute is any tax attribute which “would have been affected” if the adjustments “were taken into account” in the first affected year. Under the language of section 6226(b)(2) and (3), adjustments are not actually taken into account like they would be if an amended return was filed under § 301.6225-2(d)(2). Similarly, the increases or decreases do not actually occur as they would in the amended return context and tax attributes are not actually adjusted as part of this calculation. Accordingly, in the case of an increase in tax that would result in the first affected year or any intervening year if the adjustments were taken into account, no overpayment results for any year because there is an increase in tax, not a decrease. In the case of a decrease in tax that would result in the first affected year or any intervening year if the adjustments were taken into account, there is no overpayment because the determination of a decrease in tax is merely by reference to the relevant year to be taken into account as part of the total additional reporting year tax. Therefore, no overpayment interest is due and owing to the partner.

iii. Pass-Through Partners

The June 2017 NPRM reserved on the issue of how a pass-through partner takes into account its share of adjustments reflected on a statement furnished to the pass-through partner under § 301.6226-2. In response to the June 2017 NPRM, multiple comments recommended that pass-through partners take into account adjustments by pushing out those adjustments to the next tier of partners and suggested approaches to achieve this result.

After careful consideration of those comments, the December 2017 NPRM adopted an approach that required a pass-through partner to take into account adjustments reflected on a push out statement by either furnishing statements to its own partners or by paying an amount calculated like an imputed underpayment with respect to the adjustments, plus any applicable penalties and interest. See former proposed § 301.6226-3(e)(1). The regulations created an iterative process under which any pass-through partner receiving a statement from another pass-through partner must also take into account the adjustments on the statement by furnishing statements to its own partners or paying an amount calculated like an imputed underpayment. Any ultimate, non-pass-through partner was required to take into account its share of the adjustments as if such partner was a reviewed year non-pass-through partner. If a pass-through partner failed to take into account the adjustments in accordance with former proposed § 301.6226-3(e)(1), the pass-through partner was required to pay an amount calculated like an imputed underpayment plus any applicable penalties and interest.

Section 204(a) of the TTCA added to the Code section 6226(b)(4), which provides that a partnership or S corporation that receives a statement under section 6226(a)(2) must file a partnership adjustment tracking report with the IRS and furnish statements under rules similar to the rules of section 6226(a)(2). If the partnership or S corporation fails to furnish such statements, the partnership or S corporation must compute and pay an imputed underpayment under rules similar to the rules of section 6225. The rules under former proposed § 301.6226-3(e) were revised in the August 2018 NPRM to reflect the amendment to section 6226(b)(4). See section 4.A. of the preamble to the August 2018 NPRM.

Three comments were received regarding proposed § 301.6226-3(e). The comments focused on three topics: (1) The statements furnished under proposed § 301.6226-3(e)(3); (2) the computation of an imputed underpayment under proposed § 301.6226-3(e)(4); and (3) the payment of the additional reporting year tax by affected partners in accordance with proposed § 301.6226-3(e)(4)(iv).

I. Statements Furnished Under § 301.6226-3(e)(3)

Proposed § 301.6226-3(e)(1) provided that each pass-through partner that is furnished a statement described in § 301.6226-2 with respect to adjustments of an audited partnership must file and furnish statements to its affected partners. Affected partners are persons that held an interest in the pass-through partner at any time during the taxable year of the pass-through partner to which the adjustments in the statement relate. Consistent with section 6226(b)(4)(B), proposed § 301.6226-3(e)(3)(ii) provided that a pass-through partner must furnish such statements no later than the extended due date for the return for the adjustment year of the audited partnership. One comment recommended that the regulations provide a process by which a pass-through partner could apply to the IRS for a discretionary short-term extension of the time period set out in proposed § 301.6226-3(e)(3)(ii). This extension would address exceptional or unusual circumstances in which a pass-through partner is unable to furnish the statements to all its affected partners within the specified time frame. This comment was not adopted.

Section 6226(b)(4)(B) expressly provides that statements under section 6226(b)(4)(A) “shall be furnished by not later than the due date for the return for the adjustment year of the audited partnership.” The statute does not provide for an extension beyond the extended due date of the adjustment year return. Under proposed § 301.6226-3(e)(3)(ii), the adjustment year return due date is the extended due date under section 6081 regardless of whether the audited partnership is required to file a return for the adjustment year or timely files a request for an extension under section 6081 and the regulations thereunder. As a threshold matter, the language of section 6226(b)(4)(B), providing that statements “shall be furnished not later than” the due date suggests that discretionary extensions are not permissible. Furthermore, the due date for furnishing statements to affected partners must be fixed for all pass-through partners for the IRS to ensure statements are furnished timely and payments are timely made. In addition, the ultimate affected partners are obligated to file and pay additional reporting year tax by the extended due date of the audited partnership. Extending the due date for furnishing statements to affected partners for any pass-through partner would cause delays for upper tier affected partners and potentially subject ultimate affected partners to penalties for filing or paying additional reporting year tax more than 30 days after the extended due date. Therefore, the regulations do not provide for discretionary extensions of the time period that was set forth in proposed § 301.6226-3(e)(3)(ii).

Another comment observed that the proposed regulations did not specify who at the IRS must receive the statements furnished by a pass-through partner and recommended that the final regulations clearly state to whom at the IRS pass-through partner statements should be directed. This comment was not adopted, but the regulations were revised to provide that a pass-through partner must file and furnish statements to its affected partners in accordance with forms, instructions, or other guidance prescribed by the IRS. Providing the method for filing and furnishing statements in forms, instructions, and other guidance provides the IRS with the flexibility to change the filing and furnishing procedures as appropriate and necessary without needing to amend the regulations. This flexibility is particularly important as the IRS gains experience with the centralized partnership audit regime. Flexibility also preserves government resources and will expedite the process for the IRS to respond to taxpayer needs and for taxpayers to be aware of changes in IRS procedures.

Under § 301.6226-3(e)(3)(iii), each statement furnished by a pass-through partner must include correct information concerning certain enumerated items. These items include the name and TIN of the affected partner to whom the statement is being furnished as well as any other information required by forms, instructions, and other guidance prescribed by the IRS. One comment suggested that the regulations should clarify whether a statement provided under proposed § 301.6226-3(e) would be effective without the TIN of the affected partner if the affected partner is a foreign person not otherwise required to obtain a TIN. The comment observed that foreign persons generally are not required to obtain a U.S. TIN, particularly if they will not claim the benefits of a U.S. tax treaty.

Proposed § 301.6226-3(e)(3)(iii) required each statement furnished by a pass-through partner to include the correct TIN of the affected partner. This information is critical to the administration of the push out regime because it allows the IRS to identify the person to whom the statement is furnished, and it provides the IRS with the ability to match the adjustments on that statement with the return filed by the affected partner. In response to this comment, however, the final regulations require that a push out statement furnished under § 301.6226-3(e) include the partner's TIN “or alternative form of identification as prescribed by forms, instructions, or other guidance.” See also § 301.6226-2(e) (imposing the same requirement for push out statements furnished to reviewed year partners). In addition, the election under § 301.6226-1 by the audited partnership must include the TIN “or alternative form of identification as prescribed by forms, instructions, or other guidance” for each reviewed year partner of the partnership. See § 301.6226-1(c)(3)(ii). The addition of the quoted language in each section contemplates that there may be situations in which an alternative form of identification for certain partners is warranted.

Accordingly, as the IRS gains experience with the centralized partnership audit regime, the IRS may allow for the use of an alternative form of identification through forms, instructions, or other guidance if the IRS determines such identification is appropriate for foreign persons. This flexibility gives the IRS and partnerships time to evaluate whether an alternative form of identification is administrable and beneficial without needing to amend the regulations to allow for alternative identification, which preserves government resources and expedites the process by which the IRS responds to taxpayer needs and taxpayers become aware of changes in IRS procedures.

The same comment also recommended that to the extent practicable, the IRS identify as soon as possible any additional information that may be required in additional forms, instructions, or other guidance for statements under § 301.6226-3(e)(3). The comment suggested regulations or drafts of forms or instructions could identify such additional information, which would allow partnerships to timely, completely, and accurately collect necessary data from partners to comply with requirements and avoid the risk that the IRS would deny a push out election due to incomplete or inaccurate or untimely data.

As discussed earlier in this section of the preamble, maintaining the ability to require additional information on forms, instructions, or other guidance gives the IRS the flexibility to adapt statements without having to amend the regulations. At the same time, the IRS recognizes the need of taxpayers to know of the information required to not jeopardize compliance with the regulations. The IRS plans to develop and release drafts of forms and instructions for public inspection as soon as possible.

In addition to the changes described earlier in this Summary of Comments and Explanation of Revisions, two other clarifying changes were made to § 301.6226-3. First, § 301.6226-3(e)(3)(iii)(M) was clarified to provide that the information required to be included in statements furnished to affected partners regarding the applicability of penalties, additions to tax, or additional amounts are the determinations made at the audited partnership level pertaining to the applicability of penalties, additions to tax, or additional amounts. This change reinforces the notion that the applicability of penalties is determined at the audited partnership level and that penalties attach to adjustments as they are pushed out through the tiers. An affected partner that pays an imputed underpayment or additional reporting year tax independently determines the amount of any penalty applicable to adjustments that are taken into account by the affected partner.

In addition, § 301.6226-3(e)(4)(iv)(B) was clarified to provide that when determining interest on an imputed underpayment paid by a pass-through partner, the imputed underpayment is treated as if it were a correction amount for the first affected year. This change conforms the language in § 301.6226-3(e)(4)(iv)(B) with the language in § 301.6226-3(c) regarding interest on correction amounts.

II. Modifications Available to Pass-Through Partner Paying an Imputed Underpayment

If a pass-through partner does not furnish statements, the pass-through partner must compute and pay an imputed underpayment in accordance with proposed § 301.6226-3(e)(4). Section 6226(b)(4)(A)(ii)(II); proposed § 301.6226-3(e)(2). Pursuant to proposed § 301.6226-3(e)(4)(iii), this imputed underpayment is computed in the same manner as an imputed underpayment under section 6225 and § 301.6225-1. In calculating an imputed underpayment under proposed § 301.6226-3(e)(4)(iii), a modification is taken into account if it was approved by the IRS under § 301.6225-2 with respect to the pass-through partner (or any relevant partner holding its interest in the audited partnership through the pass-through partner) and it is reflected on the statement furnished to the pass-through partner. Any modification that was not approved by the IRS under § 301.6225-2 may not be taken into account. Proposed § 301.6226-3(e)(4)(iii).

One comment suggested that it was unclear under proposed § 301.6226-3(e)(4) whether a pass-through partner that elects to pay an imputed underpayment is only permitted to make modifications that are included on the information statement furnished to the pass-through partner or whether the pass-through partner also may make modifications based on the pass-through partner's own partners (to the extent such modification is not already reflected on the information statement). The comment recommended that the pass-through partner be permitted to make modifications based on its own partners to the extent the pass-through partner would be permitted to make modifications under section 6225 if it were the partnership directly under audit. This comment was not adopted.

Section 6226(b)(4)(A)(ii)(II) provides that a partnership may compute and pay an imputed underpayment under rules similar to the rules of section 6225 (other than section 6225(c)(2), (7), and (9)). Section 6226(b)(4)(A)(ii)(II) does not explicitly carve out section 6225(c)(8), which provides that any modification of the imputed underpayment amount under section 6225(c) shall be made only upon approval of such modification by the Secretary. Consistent with section 6225(c)(8), proposed § 301.6226-3(e)(4)(iii) only allows modifications approved by the IRS under proposed § 301.6225-2 to be taken into account in calculating an imputed underpayment with respect to a pass-through partner. Modifications approved by the IRS under § 301.6225-2 are only those modifications requested by the audited partnership and approved during the administrative proceeding with respect to the audited partnership. See § 301.6225-2(b). A pass-through partner may not use modifications that were not requested or approved in the administrative proceeding with respect to the audited partnership in calculating its imputed underpayment under proposed § 301.6226-3(e)(4).

Allowing a pass-through partner to apply modifications that were not previously requested or approved in calculating its imputed underpayment is contrary to the centralized nature of an administrative proceeding under the centralized partnership audit regime. Partnership adjustments are determined at the partnership level. Section 6221(a). The imputed underpayment is a partnership-related item and therefore modifications to the imputed underpayment are determined at the partnership level. The modification provisions under § 301.6225-2 are the appropriate method for determining whether and to what extent a modification should be allowed. Allowing pass-through partners to raise, for the first time, modifications during the push out is inconsistent with making such determinations at the partnership level. Allowing such modifications would create significant administrative burdens for the IRS. For one, the IRS would have to expend increased time and resources to review any modifications applied during push out that were not previously evaluated and approved during the modification process at the audited partnership level. This concern would be exacerbated in situations where there are multiple tiers of entities applying multiple types of additional modifications. For instance, a pass-through partner might raise again a modification that was rejected by the IRS at the audited partnership level during the modification process, causing further administrative delay and burden. Furthermore, if a modification applied by a pass-through partner was incorrectly applied, the IRS would have to expend time and resources to correct the incorrectly claimed modification, resulting in additional delays in the collection of amounts due as a result of the examination and the push out election.

III. Payment of Additional Reporting Year Tax by Affected Partners

Proposed § 301.6226-3(e)(3)(iv) provided that affected partners that are not pass-through partners must take into account their share of adjustments reflected on a statement furnished under proposed § 301.6226-3(e)(3) in accordance with proposed § 301.6226-3(e). When taking into account the adjustments, an affected partner that is not a pass-through partner bases its reporting year on the date the audited partnership furnished its statements to its reviewed year partners. As a result, the reporting year of an affected partner that is not a pass-through partner will be the same taxable year as the reporting year of a reviewed year partner that is also not a pass-through partner.

As discussed in section 1 of the Explanation of Provisions in the preamble to the December 2017 NPRM, there may be circumstances in which a statement is not furnished to an affected partner that is not a pass-through partner in time for the partner to report and pay the additional reporting year tax by the unextended due date of the partner's return for the reporting year. To account for this situation, proposed § 301.6226-3(e)(3)(iv) provided that the IRS will not impose any additions to tax under section 6651 related to any additional reporting year tax if an affected partner that is not a pass-through partner reports and pays any additional reporting year tax within 30 days of the extended due date for the return for the adjustment year of the audited partnership.

One comment recommended that the 30-day period under proposed § 301.6226-3(e)(3)(iv) should be extended to at least 60 days and that there be a mechanism for requesting and obtaining an extension of this deadline when needed. This comment was not adopted.

While it may be difficult to accurately compute and pay the additional reporting year tax in situations where the affected partner receives the statement close in time to the extended due date of the reporting year return, the affected partner has options available to mitigate any additions to tax under section 6651. First, the regulations under § 301.6226-3(e)(3)(iv) provide a 30-day period in which the IRS will not impose a section 6651 penalty. Second, the affected partner may make an estimated tax payment prior to the due date for the reporting year and use that payment as a credit against any potential liability for the additional reporting year tax to avoid failure to pay penalties.

Third, the affected partner may also request that any additions to tax under section 6651 be abated due to reasonable cause. Nothing in the regulations under the centralized partnership audit regime alters the mechanisms by which a taxpayer may raise a reasonable cause defense in response to a proposed penalty. Existing regulations under § 301.6651-1(c)(1) and the Internal Revenue Manual provide procedures for raising a reasonable cause defense to avoid an addition to tax under section 6651. If an addition to tax under section 6651 is asserted because a taxpayer did not pay the entire additional reporting year tax within 30 days of the extended due date of the audited partnership's adjustment year return, the taxpayer may follow those existing procedures to raise any reasonable cause and good faith defense that may be applicable to the taxpayer's delay in payment.

iv. Qualified Investment Entities and MLPs

Proposed § 301.6226-3(b)(4) provided rules for qualified investment entities (QIEs), such as real estate investment trusts and regulated investment companies, to utilize the deficiency dividend procedures under section 860 when taking into account the adjustments under section 6226(b). One comment recommended that the Treasury Department and the IRS adopt the rules as proposed in § 301.6226-3(b)(4) without change in the final regulations. This comment was adopted.

Another comment recommended that in the case of an MLP, the safe harbor calculation for a partner should take into account the partner's share of specified passive activity losses within the meaning of section 6225(c)(5)(B). As discussed earlier in this section of the preamble, the safe harbor amount was removed from the regulations in the December 2017 NPRM, no comments were received regarding its removal, and the final regulations do not include a safe harbor amount. Accordingly, this comment was not adopted.

v. Examples Under Proposed § 301.6226-3(h)

Proposed § 301.6226-3(h) provided examples that illustrated the rules of proposed § 301.6226-3. One comment recommended that additional examples be added to § 301.6226-3(h) to show the proper treatment of two situations. The first situation involved the IRS approving a modification based on a partner filing an amended return, the partnership challenging the IRS's adjustment in Tax Court, and the amount of the adjustment being subsequently reduced. The second situation involved the IRS determining at the partnership level a 20 percent accuracy-related penalty with respect to the partnership adjustments and the IRS approving a modification based on a partner's status as a tax-exempt entity. The comment suggested that the example illustrate how the amount of the penalty is calculated in this situation after allowance for the modification with respect to the tax-exempt entity and how the penalty is allocated among all partners, including the tax-exempt entity.

These hypotheticals were described within the portion of the comment addressing section 6226. Therefore, notwithstanding that the comment did not explicitly state that the partnership in the hypothetical made a push out election, for purposes of addressing these comments it is assumed that the partnership did make the push out election. After careful consideration, the Treasury Department and the IRS have declined to add these examples because, as described in this section of the preamble, both situations describe fact patterns that are addressed by a straight forward application of the proposed regulations, as revised in the December 2017 and August 2018 NPRMs, and thus the examples would not help clarify any aspect of the rules.

The first situation is addressed by proposed § 301.6226-3(b)(2) and (3), which provided that in calculating a correction amount, decreases in tax should be taken into account and that amounts shown on amended return filed during modification should be accounted for in the calculation. As described earlier in section C.i. of this preamble, proposed § 301.6226-3(b)(2) and (3) was revised in the August 2018 NPRM to reflect the amendments to section 6226(b) by the TTCA. As amended, section 6226(b) provides that when a reviewed year partner takes into account pushed out adjustments, the partner's chapter 1 tax for the reporting year is adjusted by the amounts the partner's chapter 1 tax for the first affected year or any intervening year would increase or decrease if the partner's share of the adjustments were taken into account in the first affected year. As a result, under proposed § 301.6226-3(b)(2) and (3) as revised in the August 2018 NPRM, a correction amount and the additional reporting year tax can be less than zero.

When the partner in the first hypothetical calculates the correction amount for the year that was amended, the partner recomputes its tax for the year by starting with the amount of tax shown on the amended return, which had been based on the full amount of the adjustment (prior to its reduction by the court decision). The partner then determines the amount the partner's chapter 1 tax would have increased or decreased were the reduced adjustment taken into account for that year. If the partner's tax for the amended year decreases as a result of the reduced adjustment, that decrease in tax produces a negative correction amount, which in turn produces a negative additional reporting year tax. The negative additional reporting year tax would then reduce the partner's tax for the reporting year.

The second situation is addressed by proposed § 301.6226-3(d) as previously revised in the December 2017 NPRM. As discussed earlier in this section of the preamble, proposed § 301.6226-3(d)(2) provided that each reviewed year partner calculates its penalty amount by treating the correction amounts determined under § 301.6226-3(b) as if they were underpayments or understatements for the first affected year or any intervening year. This rule is different from the rule initially set forth in former proposed § 301.6226-2(f)(3). Under the former rule, to which the comment's recommendation related, each partner was allocated their share of the penalty that was calculated at the partnership level. Under the rule in proposed § 301.6226-3(d), however, a partner's penalty calculation is based on the characteristics of, and facts and circumstances applicable to, the reviewed year partner. Accordingly, while the applicability of the accuracy-related penalty in the second hypothetical described by the comment was determined at the partnership level, if as a result of taking into account the adjustments under § 301.6226-3(b), the tax-exempt entity would not have an underpayment or understatement for which a penalty was applicable, the penalty amount calculated by the tax-exempt entity pursuant to § 301.6226-3(d)(2) would be zero. Whether modification was requested or approved with the tax-exempt entity would not affect this determination.

The same comment also recommended adding an example to show the proper application of partner and partnership-level tax attributes to the calculation of a correction amount for an intervening year. This recommendation was also not adopted.

Former proposed § 301.6241-1(a)(10) had defined the term tax attribute to include both the tax attributes of the partnership and the tax attributes of its partners. This definition was changed in the August 2018 NPRM to remove references to the partnership or the partner. This change allows “tax attribute” to apply to the partnership or to a partner depending on the particular context within which it is used. See section 11.A. of the preamble to the August 2018 NPRM. As a result, the definition of tax attribute in proposed § 301.6241-1(a)(10), as revised, did not refer to either the partnership or its partners.

Former proposed § 301.6226-3(b)(3) had provided that an intervening year correction amount was derived by recomputing a partner's taxable income by taking into account any adjustments to tax attributes. After the change to the definition to tax attribute, proposed § 301.6226-3(b)(3) was revised to make clear that in the context of calculating an intervening year correction amount, it is the “tax attributes of the partner” that are relevant, not the tax attributes of the partnership. As a result, under proposed § 301.6226-3(b)(3) as revised in the August 2018 NPRM, partnership-level tax attributes no longer factor into the calculation of an intervening year correction amount. See proposed § 301.6226-3(h), Example 7; section 4.A. of the preamble to the August 2018 NPRM. Given these revisions, an example showing the application of partnership-level tax attributes would no longer be accurate for computing an intervening correction amount under § 301.6226-3(b)(3).

The Treasury Department and the IRS have also declined to add an example illustrating the application of a partner's tax attributes to the calculation of its correction amount for an intervening year. Creating an example involving the tax attributes of a specific partner would necessitate a description of that particular partner's tax profile and would require a number of assumptions that would strip the example of its utility.

Example 5 of proposed § 301.6226-3(h) described a situation in which the IRS determines a $200 partnership adjustment with respect to taxable year 2020 and a resulting $40 imputed underpayment. During the modification process, Partner F files amended returns for 2020, 2021, and 2022 taking into account F's share of the $200 partnership adjustment, and the IRS approves that modification. See § 301.6225-2(d)(2). The partnership elects to make a push out election with respect to the $40 imputed underpayment and furnishes a statement to F reflecting F's share of the $200 partnership adjustment and reflecting the approval of F's amended return modification.

Former proposed § 301.6226-3(g) had provided that F computes its correction amounts for the first affected year and the intervening years and that F “computes any additional chapter 1 tax for those years using the returns for 2020, 2021, and 2022 taxable years as amended during the modification process.” One comment found the quoted language ambiguous and recommended the language be revised to provide that “F's computation will take into account the additional chapter 1 tax that F reported and paid pursuant to the modification process on amended returns for the 2020, 2021, and 2022 taxable years.” This comment has been adopted.

Although F takes into account the chapter 1 tax F reported and paid with its amended returns, F still must compute the correction amounts for each year under § 301.6226-3(b). F cannot assume F's additional reporting year tax is zero because of the fact F filed an amended return and took into account the adjustments during the modification process. For example, F may have inadvertently taken the adjustments into account incorrectly when filing its amended returns or filed a subsequent amended return, and as a result F may compute an additional reporting year tax that is greater than (or possibly less than) zero when F performs the calculation under § 301.6226-3(b) for the reporting year.

The comment also recommended changing the language “[t]he time to file a petition expires on” in Examples 2-4 and 6-9 under proposed § 301.6226-3(h) to “[t]he last day to file a petition is.” Under § 301.6226-2(b)(1)(i), if a petition is not filed under section 6234, the adjustments become finally determined upon the expiration of the time to file a petition under section 6234. Although this is determined in relation to the last day to file a petition under section 6234, the language in the examples mirrors the regulatory language under § 301.6226-2(b)(1)(i). Changing the language in the examples to differ from the language in the rule could create confusion and ambiguity. Accordingly, this comment was not adopted.

Lastly, several comments noted typographical errors and incorrect cross-references in the examples under former proposed § 301.6226-3. These errors were fixed in proposed § 301.6226-3(h). See section 4.B. of the preamble to the August 2018 NPRM.

5. Administrative Adjustment Requests

Four comments were received concerning administrative adjustment requests under section 6227. The comments addressed the following topics: (1) The requirement that the partnership representative must sign an AAR; (2) the ability to report multiple imputed underpayments in a single AAR; (3) the modifications available in the case of an AAR; (4) how partners take into account adjustments requested in an AAR; (5) the availability of the safe harbor amount; (6) the application of section 905(c); and (7) how partnerships that have elected out of the centralized partnership audit regime file amended returns. In addition to addressing the comments, this section of the preamble explains a change to the rules regarding whether an AAR is valid if it fails to include required statements and interest with respect to imputed underpayments reported on an AAR.

A. Requirement That the Partnership Representative Signs an AAR

Proposed § 301.6227-1(c) provided the form and manner for making an AAR under the centralized partnership audit regime, including the rule that an AAR must be signed under penalties of perjury by the partnership representative. One comment recommended that the regulations remove the requirement that the partnership representative sign an AAR and instead allow any person authorized to sign the original partnership return to sign the AAR. This comment was not adopted.

Under section 6223(b), the partnership and all partners of such partnership are bound by actions taken under the centralized partnership audit regime by the partnership. See § 301.6223-2(a). The filing of an AAR under section 6227 is an action under the centralized partnership audit regime. Under section 6223(a), the partnership representative has the sole authority to act on behalf of the partnership under the centralized partnership audit regime. Consequently, only the partnership representative has the authority to file an AAR under section 6227, and the final regulations maintain the requirement that the partnership representative sign an AAR.

The comment expressed concern that, in some circumstances, obtaining the signature of the partnership representative could be difficult or impossible. For example, if the partnership representative is deceased or where a partnership representative whose designation is being revoked refuses to sign the AAR. The regulations under section 6223 and 6227 accommodate the concern illustrated in these examples. Under § 301.6223-1(e)(2)(ii), a partnership may revoke a designation of a partnership representative by filing a valid AAR in accordance with section 6227. The revocation must include a designation of a successor partnership representative. § 301.6223-1(e)(1). Both the revocation and the designation are effective on the date the partnership files the AAR. § 301.6223-1(e)(3).

Proposed § 301.6227-1(a) provided that when the partnership changes the designation of the partnership representative in conjunction with the filing of an AAR in accordance with § 301.6223-1(e), the change in designation is treated as occurring prior to the filing of the AAR. Under this rule, the prior partnership representative is revoked and a new partnership representative is designated prior to the time the AAR is filed, with the result that the newly designated partnership representative is the partnership representative of record at the time the AAR is filed. This rule was designed to address the circumstances described by the comment when it may be difficult to obtain the signature of the prior partnership representative and to make clear that it is the newly designated partnership representative that signs an AAR. Because § 301.6227-1(a), in connection with the regulations under section 6223, adequately address the concerns raised by the comment, the comment was not adopted.

B. Multiple Imputed Underpayments

Proposed § 301.6227-1(a) provided that when filing an AAR, the partnership must determine whether the adjustments requested in the AAR result in an imputed underpayment. Under proposed § 301.6227-2(a)(1), the determination of whether adjustments requested in an AAR result in an imputed underpayment and the determination of the amount of the imputed underpayment is made in accordance with the rules under § 301.6225-1. Generally, a partnership must pay any imputed underpayment determined under § 301.6227-2(a) resulting from the adjustments requested in an AAR on the date the partnership files the AAR. Proposed § 301.6227-2(b). In lieu of paying the imputed underpayment under § 301.6227-2(b), the partnership may elect to have each reviewed year partner take into account the adjustments requested in the AAR in accordance with § 301.6227-3. Proposed § 301.6227-2(c).

One comment observed that it was unclear whether the references to “an imputed underpayment” in proposed § 301.6227-2(a)(1) and to “the imputed underpayment” in proposed § 301.6227-2(c) imply that there can be only one imputed underpayment in an AAR, or whether more than one imputed underpayment can be calculated in an AAR. The comment recommended the regulations should clarify that a single AAR can result in multiple imputed underpayments, some of which can be paid while others are pushed out, and that adjustments that do not result in an imputed underpayment can be pushed out.

Neither section 6227 nor the regulations thereunder prohibit a partnership from filing multiple AARs for the same taxable year to request multiple adjustments to partnership-related items. To allow the IRS to respond to issues that arise in implementing the new partnership audit regime, proposed § 301.6227-1(c) required that an AAR must be filed with the IRS in accordance with the forms, instructions, and other guidance prescribed by the IRS. The current version of the form prescribed by the IRS for filing an AAR is not designed to accommodate the reporting of multiple imputed underpayments. A partnership may file multiple AARs to allocate adjustments into separate imputed underpayments. For example, the partnership may file one AAR reporting an imputed underpayment that the partnership pays, while filing another AAR reporting an imputed underpayment for which the partnership elects to push out the adjustments associated with that imputed underpayment. Accordingly, a partnership, by filing multiple AARs, can achieve the result requested by the comment—that is, the ability to pay an imputed underpayment with respect to certain adjustments and push out other adjustments associated with a different imputed underpayment.

In response to the comment, the regulations have been revised to refer to “an” or “any” imputed underpayment, as appropriate, to accommodate future cases in which an AAR may result in more than one imputed underpayment. In addition, §§ 301.6227-2(c) and 301.6227-3(a) have been revised to clarify that in the case of an election to have the reviewed year partners take into account the adjustments in an AAR, such partners take into account only those adjustments that are associated with the imputed underpayment to which the election relates. Notwithstanding these revisions, the regulations continue to refer to the form for filing an AAR and its instructions for purposes of instructing how a partnership requests adjustments in an AAR that result in an imputed underpayment.

C. Modifications Available in the Case of an AAR

Proposed § 301.6227-2(a)(2) provided that a partnership may apply modifications to the amount of the imputed underpayment determined under proposed § 301.6227-2(a)(1) using only certain, enumerated modifications as described in proposed § 301.6225-2 or as provided in forms, instructions, or other guidance prescribed by the IRS with respect to AARs. A partnership may not modify an imputed underpayment resulting from adjustments requested in an AAR except as described in proposed § 301.6227-2(a)(2).

Proposed § 301.6225-2(d)(10) provided a catch-all provision for other modifications under which a partnership may request a modification not described in proposed § 301.6225-2(d), and the IRS will determine whether such modification is accurate and appropriate. Similarly, proposed § 301.6225-2(d)(10) provided that additional types of modifications, and the documentation necessary to substantiate such modifications, may be set forth in forms, instructions, or other guidance.

One comment suggested that the regulations should be more flexible regarding the types of modifications that are allowed in the case of an AAR. Specifically, the comment recommended that proposed § 301.6227-2(a)(2) be revised to allow for the catch-all provision under proposed § 301.6225-2(d)(10) on the condition that the IRS approves of the relevant modification upon review of the AAR. This comment was not adopted.

Both proposed § 301.6225-2(d)(10), in the context of an audit, and proposed § 301.6227-2(a)(2), in the context of an AAR, provide that the IRS may set forth additional modifications in forms, instructions, or other guidance. To the extent the comment was recommending that adoption of the § 301.6225-2(d)(10) catch-all provision in § 301.6227-2(a)(2) would allow the IRS to set forth other modifications not specifically described in proposed § 301.6227-2(a)(2), that ability is already provided for by the plain language of § 301.6227-2(a)(2).

To the extent the comment was recommending a rule in which a partnership could request a modification in an AAR on the condition that modification is only allowed upon approval by the IRS, the comment was not adopted. The final regulations adopt the rule that a partnership may not modify an imputed underpayment resulting from adjustments requested in an AAR except for the modifications described in proposed § 301.6227-2(a)(2). Under proposed § 301.6227-2(a)(2)(i), the partnership is not required to seek approval from the IRS prior to applying modifications to the amount of any AAR imputed underpayment. This rule permits a partnership to determine an imputed underpayment that results from the adjustments requested in an AAR and apply modifications when calculating the amount of the imputed underpayment the partnership needs to pay when filing the AAR. The Treasury Department and the IRS have determined that this procedure is more administrable for the IRS and allows partnerships to more effectively file AARs and take any adjustments into account. The partnership does not have to wait for an IRS determination regarding specific modifications before determining the amount of the imputed underpayment as modified, which would significantly hamper the AAR process.

Because the partnership applies modifications prior to the IRS reviewing and approving such modifications, the specifically enumerated modifications in the regulations are limited to the types of modifications for which the IRS already has procedures and systems in place. This permits the IRS, when it reviews an AAR, to utilize those procedures and systems to determine the accuracy and appropriateness of the modification that was applied in the AAR. The limitation on the types of modifications, in addition to the detailed information required under § 301.6227-2(a)(2)(ii), is designed to provide partnerships the ability to reasonably modify an imputed underpayment resulting from adjustments requested in an AAR while not creating undue delay for the partnership and its partners to take the adjustments into account. Also, by providing certainty regarding the permissible types of modifications, a partnership will be able to efficiently use its time and resources in determining whether it will pay an imputed underpayment or elect to have its partners take into account the adjustments. Finally, as the IRS gains more experience with modifications in connection with an AAR under the centralized partnership audit regime, § 301.6227-2(a)(2) provides the ability for the IRS to expand the set of allowed modifications through the use of forms, instructions, or other guidance.

D. Partners Taking Into Account Adjustments Requested in an AAR

Former proposed § 301.6227-3 included a reserved paragraph regarding how a reviewed year partner that is a pass-through partner takes into account its share of adjustments requested in an AAR. In response to the June 2017 NRPM, one comment recommended that the regulations should allow a pass-through partner to push out its share of adjustments to the next tier of partners. The December 2017 NPRM contained proposed rules under § 301.6227-3 allowing for pass-through partners to take into account adjustments requested in an AAR by either making a payment or pushing out the adjustments to the next tier of partners, similar to the rules under proposed § 301.6226-3(e). The rules under proposed § 301.6227-3 were further revised in the August 2018 NPRM to reflect the amendments by section 204 of the TTCA and the corresponding changes to proposed § 301.6226-3(e). See section 5 of the preamble to the August 2018 NPRM. As a result, the comment was adopted in the August 2018 NPRM and is also included in the final regulations.

Example 2 under proposed § 301.6227-3(b)(2), regarding how partners other than pass-through partners take into account AAR adjustments, was revised to remove the language indicating that the partner may make a claim for refund with respect to the overpayment of $25. Instead, the final regulations provide that the partner may make a claim for refund with respect to “any overpayment.” Section 301.6227-3(b)(1) provides that nothing in the rules under § 301.6227-3 entitles any partner to a refund of chapter 1 tax to which such partner is not entitled. Whether an overpayment exists is determined under provisions of the Code and relevant case law outside the scope of these regulations. Generally, an overpayment and the amount of a refund of an overpayment cannot exceed the amount of tax paid. See section 6511(b)(2), Jones v. Liberty Glass, 332 U.S. 524, 531 (1947). No refund or credit can be made unless it has first been determined that the taxpayer has made an overpayment of tax for the period at issue. Lewis v. Reynolds, 284 U.S. 281, 283 (1932).

Example 2 was also revised to clarify that the partner's chapter 1 tax for 2022 is −$25, that is, negative $25. This change conforms Example 2 to the rules under § 301.6226-3(b) which allow for the additional reporting year tax to reduce a partner's chapter 1 tax for the reporting year.

Finally, minor revisions were made to clarify that any adjustment that does not result in an imputed underpayment is taken into account by reviewed year partners.

E. Availability of Safe Harbor for Partners Taking Into Account Adjustments

The June 2017 NPRM requested comments on whether the election to pay a safe harbor amount under former proposed § 301.6226-3 should be available in the case of a partner that must take into account adjustments requested in an AAR under proposed § 301.6227-3. One comment recommended that the regulations require a partnership filing an AAR to calculate a safe harbor amount for each partner required to take into account the adjustments requested in the AAR and include such safe harbor amount in the statement furnished to the partner.

For the reasons discussed in section 4 of the preamble to the December 2017 NPRM, the safe harbor amount was removed from the regulations. No comments were received regarding its removal, and the final regulations do not include a safe harbor amount. Accordingly, this comment was not adopted.

F. Application of Section 905(c)

One comment recommended rules for how a partnership subject to the centralized partnership audit regime can fulfill the requirements of section 905(c), including the rules relating to the assessment and collection of interest on certain refunds of creditable foreign taxes. The final regulations under section 6227 do not provide rules regarding the application of section 905(c), but do include a reserved paragraph regarding notice of change to amounts of creditable foreign tax expenditures. See § 301.6227-1(g). The recommendations put forth by the comment remain under consideration.

G. Partnerships That Have Elected Out of the Centralized Partnership Audit Regime

One comment suggested that the regulations address how a partnership that has a valid election under section 6221(b) in effect for a particular taxable year should report changes to its original partnership return from that year. Section 6227 is the mechanism for partnerships that are subject to the centralized partnership audit regime to file an AAR to correct errors on a partnership for a prior year. A partnership that has made a valid election under section 6221(b) in accordance with § 301.6221(b)-1 is not subject to such regime. Accordingly, a partnership that has elected out of the centralized partnership audit regime is not subject to section 6227 and therefore does not file an AAR to correct errors on its original return. The manner in which a partnership that has elected out should report changes to its original return is outside the scope of these regulations.

H. Whether an AAR Is Valid Without Statements

Proposed § 301.6227-1(c)(2) provided that a valid AAR must include the adjustments requested, the statements described in § 301.6227-1(e) if a reviewed year partner is required to take into account the adjustments requested, and other information prescribed by the IRS in forms, instructions, or other guidance. The final regulations clarify that in the case of a failure to provide the information required under § 301.6227-1(c)(2), the IRS may, but is not required to, invalidate an AAR or readjust items that were adjusted in the AAR.

Conversely, the word “valid” was added to § 301.6227-2(b)(1) to clarify that only a valid election under § 301.6227-2(c) turns off the partnership's obligation to pay an imputed underpayment resulting from adjustments requested in an AAR.

I. Adjustments That Do Not Result in an Imputed Underpayment

Under § 301.6225-1(f)(1), two situations occur where there may be adjustments that do not result in an imputed underpayment. Under § 301.6225-1(f)(1)(i), a partnership adjustment does not result in an imputed underpayment if the result of netting with respect to any grouping or subgrouping that includes the particular partnership adjustment is a net negative adjustment. Under § 301.6225-1(f)(1)(ii), a partnership adjustment does not result in an imputed underpayment if the calculation under § 301.6225-1(b)(1) resulted in an amount that is zero or less than zero. Proposed § 301.6227-3(c)(2) provided rules regarding how a pass-through partner takes into account adjustments that do not result in an imputed underpayment. The proposed rule was unclear as to whether the rule applied to both types of situations. The final regulations under § 301.6227-3(c)(2) clarify that a pass-through partner must take into account AAR adjustments that, with respect to that pass-through partner, do not result in an imputed underpayment by furnishing statements to its affected partners. This rule applies to both adjustments that do not result in an imputed underpayment pursuant to § 301.6225-1(f)(1)(i) and adjustments that do not result in an imputed underpayment pursuant to § 301.6225-1(f)(1)(ii). This rule also applies in situations where the pass-through partner pays an imputed underpayment. The final regulations under § 301.6227-1(e)(2) additionally clarify that when a partnership pays an imputed underpayment and there are adjustments that did not result in that imputed underpayment pursuant to § 301.6225-1(f)(1)(i), only the adjustments that did not result in an imputed underpayment are to be included in the statements to its affected partners.

J. Interest With Respect to an Imputed Underpayment Resulting From AAR Adjustments

Proposed § 301.6227-2(b)(2) provided that interest on an imputed underpayment resulting from adjustments requested in an AAR is determined under chapter 67 of the Code for the period beginning on the date after the due date of the partnership return for the reviewed year (determined without regard to extension) and ending on the earlier of the date payment of the imputed underpayment is made, or the due date of the partnership return for the adjustment year. In the case of any failure to pay an imputed underpayment by the due date of the partnership return for the adjustment year, interest is determined in accordance with section 6233(b)(2). Proposed § 301.6227-2(b)(2).

To conform the rules under proposed § 301.6227-2(b)(2) with the rules under proposed §§ 301.6232-1(b), 301.6233(a)-1(b), and 301.6233(b)-1(c), the final regulations provide that interest on an imputed underpayment resulting from adjustments requested in an AAR ends on the date the AAR is filed. In the case of any failure to pay an imputed underpayment on the date the AAR is filed, interest is determined in accordance with section 6233(b)(2) and § 301.6233(b)-1(c).

6. Notices of Proceedings and Adjustments

Former proposed § 301.6231-1(b)(1) provided that a notice of proposed partnership adjustment (NOPPA) is timely if it is mailed before the expiration of the period for making adjustments under section 6235(a)(1), including any extensions of that period under section 6235(b) and after applying any of the special rules in section 6235(c). After former proposed § 301.6231-1(b)(1) was issued, section 206(h) of the TTCA amended section 6231(b) to provide that a NOPPA shall not be mailed later than the date determined under section 6235(a)(1). Prior to this amendment, the statute did not limit the period for the IRS to propose adjustments under the centralized partnership audit regime. Because former proposed § 301.6231-1 comported with the TTCA amendments to section 6231, former proposed § 301.6231-1 was not revised when the regulations were re-proposed in the August 2018 NPRM.

One comment received prior to the issuance of former proposed § 301.6231-1 and before the TTCA amendments to section 6231(b) recommended that the regulations clarify that a NOPPA must be issued within the three-year period specified in section 6235(a)(1). Because the statute and the plain language of proposed § 301.6231-1 reflect the rule suggested by this comment, the final regulations adopt the language of the proposed regulations without change.

Section 6227(c) provides that a partnership has three years from the later of the filing of the partnership return or the due date of the partnership return (excluding extensions) to file an AAR for a taxable year. However, a partnership may not file an AAR for a partnership taxable year after the IRS has mailed a NAP under section 6231 with respect to that taxable year. Section 6227(c); § 301.6227-1(b). Proposed § 301.6231-1(f) provided that the IRS may, without consent of the partnership, withdraw any NAP or NOPPA, and any NAP or NOPPA that has been withdrawn by the IRS has no effect for purposes of subchapter C of chapter 63. If the IRS withdraws a NAP with respect to a partnership taxable year under proposed § 301.6231-1(f), the prohibition under section 6227(c) on filing an AAR after the mailing of a NAP no longer applies with respect to such taxable year.

One comment stated that the rule under proposed § 301.6231-1(f) lifting the prohibition on filing an AAR after a NAP is meaningless if the three-year period of limitations under section 6227(c) to file an AAR has already expired. The comment suggested that the language in proposed § 301.6231-1(f) be revised to provide that a NAP that has been withdrawn by the IRS has no effect for purposes of subchapter C or chapter 63 “except for suspension of the period of limitations under section 6227 as provided in § 301.6227-1(b).” The comment suggested a corresponding change to proposed § 301.6227-1(b) to provide that the period of limitations for filing an AAR is suspended while a NAP is outstanding. These suggestions have not been adopted.

First, section 6227 does not authorize the Treasury Department or the IRS to suspend the period of limitations within which a partnership may file an AAR. By way of contrast, other statutory provisions within subchapter C of chapter 63, such as section 6235(b) and section 6225(c)(7), do provide authority for the IRS to extend certain time periods. The absence of similar authority in section 6227 indicates the IRS does not have the authority to suspend the period of limitations under section 6227(c).

Moreover, because of the required timing of an examination under the centralized partnership audit regime, it is likely that in many cases when a NAP is withdrawn, there will still be time left on the period of limitations to file a timely AAR. In order for a NOPPA to be timely mailed, it generally must be issued within three years of the date on which the partnership return for such taxable year was filed or the return due date for the taxable year. Section 6235(a)(1). To allow for sufficient time to examine the partnership taxable year and to mail a timely NOPPA, the IRS will normally mail the NAP early on in that three-year period.

The period for filing a timely AAR under section 6227(c) runs concurrently with the three-year period for mailing a NOPPA. If after the issuance of the NAP a partnership finds that it agrees with the adjustments the IRS has raised with the partnership during the examination, the partnership may also find that it is more efficient for both the partnership and the IRS to file an AAR, rather than have those adjustments be made in the context of the partnership-level exam. In such a case, the partnership may inform the IRS of its desire to file an AAR, and the IRS can determine whether it is appropriate, in the view of the IRS, to withdraw the NAP in light of all of the facts and circumstances. It is incumbent upon the partnership to inform the IRS of its desire to file an AAR at the earliest possible point in the exam to ensure the NAP can be withdrawn with sufficient time in the section 6227(c) period to file an AAR.

Proposed § 301.6231-1(f) provided that a NAP that has been withdrawn by the IRS has no effect for purposes of subchapter C of chapter 63. Under § 301.6223-1(d)(2) and (e)(2), however, if the IRS withdraws a NAP pursuant to § 301.6231-1(f), any valid resignation or revocation of a partnership representative designation or designated individual appointment prior to the withdrawal of the NAP remains in effect. To conform these two sets of rules, the final regulations under § 301.6231-1(f) clarify that a withdrawn NAP has no effect for purposes of subchapter C of chapter 63 except as described in § 301.6223-1(d)(2) and (e)(2).

In addition, proposed § 301.6231-1(f) was revised to clarify that if the IRS withdraws a NAP or NOPPA, the NAP or NOPPA is treated as if it were never issued, in addition to the NAP or NOPPA not having any effect for purposes of subchapter C of chapter 63. This change conforms the language of the final regulations under § 301.6231-1(f) more closely with the language of section 6227(c).

Lastly, the final regulations under § 301.6231-1(f) clarify that the withdrawal of a NAP or NOPPA obviates the limitation under § 301.6222-1(c)(5) providing that a partner may not treat an item inconsistently after a NAP has been mailed with respect to a partnership taxable year. This change clarifies that if the IRS withdraws a NAP, a partner may treat an item inconsistently from how the item was treated on the partnership return after the withdrawal of the NAP.

7. Assessment, Collection, and Payment of Imputed Underpayments

Proposed § 301.6232-1(d)(1)(i) provided that a notice to a partnership that, on account of a mathematical or clerical error appearing on the partnership return or as a result of a failure by a partnership-partner to comply with section 6222(a), the IRS has adjusted or will adjust partnership-related items to correct the error or to make the items consistent under section 6222(a) and has assessed or will assess any imputed underpayment resulting from the adjustment is not considered an FPA under section 6231(a)(3). A petition for readjustment under section 6234 may not be filed with respect to such notice, and the limitations under proposed § 301.6232-1(c) (providing that generally no assessment can be made before the mailing of an FPA or, if applicable, a final court decision) do not apply to an assessment under § 301.6232-1(d)(1)(i). A partnership generally may request abatement of such assessments, but abatement is not available where an adjustment that is the subject of a notice described in proposed § 301.6232-1(d)(1)(i) is due to the failure of a partnership-partner to comply with section 6222(a). Proposed § 301.6232-1(d)(1)(ii).

One comment recommended that the regulations include a statement that the assessment procedures under § 301.6232-1(d)(1)(i) will be narrowly construed and applied. The comment suggested as an example that the regulations make clear that an assessment against a partner of a partnership-partner will not be treated as a mathematical or clerical error where the partner has reported the items at issue consistently with the partnership-partner, even though the partnership-partner may not have been consistent with the partnership in which it is a partner. These suggestions were not adopted.

Nothing in the statute indicates that section 6232(d) should be construed or applied to a particular degree. More specifically, a rule providing that section 6232(d) will be applied and construed narrowly would be vague and not give helpful guidance to taxpayers or the IRS. For these reasons, the comment's suggestion regarding construing and applying section 6232(d) narrowly was not adopted, and the regulations do not include a statement to that effect.

Regarding the comment's example of a rule that might reflect a narrow construction of the regulations, this suggestion was also not adopted. Proposed § 301.6232-1(d)(1)(iii) provided that in the case of a partnership-partner that has an election under section 6221(b) in effect, any tax resulting from an adjustment due to the partnership-partner's failure to comply with section 6222(a) may be assessed with respect to the reviewed year partners of the partnership-partner (or indirect partners of the partnership-partner). Such tax may be assessed in the same manner as if the tax were on account of a mathematical or clerical error appearing on the reviewed year partner's or indirect partner's return, except that the procedures under section 6213(b)(2) for requesting an abatement of such assessment do not apply. Proposed § 301.6232-1(d)(1)(iii). For all other partnership-partners, the IRS may assess an imputed underpayment against such partnership-partner on account of a failure to meet the consistency requirements under section 6222(a). See § 301.6232-1(d)(1)(i). The rule suggested by the comment thus would apply in the case of partnership-partners that have an election under section 6221(b) in effect and that fail to meet the requirements of section 6222(a).

Section 6232(d) provides that any adjustment on account of a failure of a partnership that is a partner in another partnership to meet the requirements of section 6222(a) shall be treated as an adjustment based on mathematical or clerical error, and rules similar to those under section 6213(b)(1) shall apply. In the case of partnership-partners that have an election in effect under section 6221(b), sections 6213 and 6232 allow the IRS to assess tax against the partners of such partnership-partner, without providing for a method to seek abatement of that assessment. Section 6232(d)(1)(B) provides that any adjustment on account of a failure by a partnership-partner to meet the consistency requirements under section 6222(a) is treated as an adjustment due to a mathematical or clerical error. Accordingly, an assessment that follows any adjustment to the partnership-partner's return pursuant to section 6232(d) is not subject to the prohibition under section 6213(a), which would otherwise require a notice of deficiency to be mailed to the taxpayer. Additionally, section 6232(d)(1)(B) explicitly provides that the provisions under section 6213(b)(2), permitting abatement of such assessment, do not apply. Therefore, the IRS may assess tax against the partners of a partnership-partner where the partnership-partner reported inconsistently and has an election in effect under section 6221(b) without first having to issue a notice of deficiency to the partner, and abatement of the assessment under section 6213(b)(2) is not available. Accordingly, no changes were made in response to this comment.

The same comment also suggested that the regulations explain how a taxpayer may properly challenge a mathematical or clerical error assessment made by the IRS under proposed § 301.6232-(d)(1)(ii)(B) where the normal abatement procedures are unavailable. This comment was not adopted.

In the case where an imputed underpayment has been assessed pursuant to § 301.6232-(d)(1)(ii)(B) against a partnership-partner that has not complied with section 6222(a), the partnership-partner may be able to file an AAR subsequent to that assessment in accordance with the provisions of sections 6222 and 6227. While the AAR may readjust the partnership-related items at issue which resulted in the imputed underpayment, in effect providing an opportunity to the partnership to contest the adjustments, such readjustments would be required to be taken into account by the partnership's partners pursuant to the rules under section 6227 because the readjustments would necessarily be adjustments that would not result in an imputed underpayment. See §§ 301.6227-1(a), 301.6227-3(a). Those readjustments may reduce the partner's tax in the reporting year, but nothing would give the partnership-partner the ability to claim a refund of any imputed underpayment paid. Accordingly, it is the burden of a partnership-partner to ensure it has complied with the provisions of section 6222(a), either by treating items consistently with the manner in which they are treated on the partnership return or by notifying the IRS of any inconsistency, in order to preclude an assessment of an imputed underpayment under section 6232(d)(1)(B).

Under § 301.6232-(d)(1)(ii)(B), a partnership-partner that has failed to comply with section 6222(a) may, prior to assessment, correct an inconsistency by filing an AAR under section 6227 or filing an amended partnership return and furnishing amended statements, as appropriate. To clarify that an AAR in such a situation is only permitted to the extent allowed under section 6227, including the timing restrictions under section 6227(c), the final regulations under § 301.6232-(d)(1)(ii)(B) provide that the partnership may file an AAR “in accordance with” section 6227.

In the situation where an imputed underpayment has been assessed pursuant to § 301.6232-(d)(1)(ii)(B) against a partnership-partner but such partnership-partner had in fact complied with the provisions of section 6222(a), the partnership may be able to seek a refund of the any imputed underpayment paid on the ground that the adjustment should not have been treated as being on account of mathematical or clerical error. Any ability to seek a refund in this situation, however, is outside the scope of these regulations. For these reasons, no changes were made to the regulations under § 301.6232-1(d) in response to this comment.

8. Interest and Penalties Related to Imputed Underpayments

Proposed § 301.6233(a)-1(a) provided that except to the extent provided in section 6226(c) and the regulations thereunder, in the case of a partnership adjustment for a reviewed year, a partnership is liable for interest and for any penalty, addition to tax, or additional amount as provided in proposed § 301.6233(a)-1(c). Proposed § 301.6233(a)-1(c)(1) provided that in accordance with section 6221(a), the applicability of any penalties, additions to tax, and additional amounts that relate to a partnership adjustment is determined at the partnership level as if the partnership had been an individual subject to tax imposed by chapter 1 of the Code for the reviewed year, and the imputed underpayment were an actual underpayment of tax or understatement for such year. Proposed § 301.6233(a)-1(c)(2) provided rules that apply in the case of penalties imposed under sections 6662, 6662A, and 6663 with respect to partnership adjustments.

A. Defenses to Penalties

Proposed § 301.6233(a)-1(c)(1) provided that a partner-level defense (as described in § 301.6226-3(d)(3)) may not be raised in a proceeding of the partnership. As discussed in section 4.C.ii.I of this preamble, one comment recommended that the regulations clarify that a partnership that makes a push-out election will be able to avail itself of partner-level defenses at the partnership level. Another comment recommended that the regulations should provide a mechanism for partners to raise partner-level defenses prior to assessment, rather than requiring the partner to first pay the penalty and then file a claim for refund to raise the partner-level defense. The comment stated the post-payment process would be unduly burdensome on partners and that a pre-payment process would not impair the audit process for the IRS. These comments were not adopted.

Section 6233 provides that penalties are determined as if the partnership had been an individual subject to chapter 1 tax for the reviewed year. In determining whether a penalty applies during the partnership proceeding, therefore, it is only the conduct of the partnership that is relevant. Allowing the partnership or partners to raise partner-level defenses and requiring the IRS to evaluate a partner's facts and circumstances during the partnership proceeding contravenes that purpose of the centralized partnership audit regime. Such a rule would also significantly impair the IRS's audit process. As discussed in section 3 of this preamble regarding the determination of imputed underpayments, an examination under the centralized partnership audit regime is a centralized proceeding wherein partner tax attributes are generally unaccounted for. Requiring the IRS to evaluate the specific facts and circumstances of each partner undermines the centralized nature of the proceeding and could significantly delay the examination.

Moreover, section 6233 treats an imputed underpayment as if it were an actual underpayment or understatement for the reviewed year. A partner-level defense by itself cannot reduce the amount of an imputed underpayment. Even if the partner-level defense were sufficient to provide penalty relief, that relief does not affect the amount of the imputed underpayment. A partner-level defense can only be relevant in situations where the imputed underpayment is reduced because a partner takes into account the adjustments that resulted in the imputed underpayment, for example as part of modification, or where there is no partnership-level liability for the imputed underpayment because of an election by the partnership under section 6226 to have its partners take into account the adjustments. Only upon taking into account the adjustments will a partner know the amount of the penalty the partner is liable for and therefore whether a defense to the penalty is needed. Accordingly, comments suggesting that the partnership be permitted to raise partner-level defenses to reduce a penalty imposed against the partnership were not adopted. For discussion of partner-level defenses in the context of modification and the push out election, see sections 3.C and 4.C.ii.I of this preamble.

B. Determining the Portion of the Imputed Underpayment to Which the Penalty Applies

Proposed § 301.6233(a)-1(c)(2)(ii) provided rules for determining the portion of the imputed underpayment to which a penalty applies where there exists (1) at least one adjustment with respect to which no penalty has been imposed and at least one adjustment with respect to which a penalty has been imposed or (2) at least two adjustments with respect to which penalties have been imposed and the penalties have different rates. In general, to determine the portion of the imputed underpayment to which the penalty applies, all partnership adjustments that resulted in the imputed underpayment were grouped together according to whether they were adjustments with respect to which a penalty has been imposed and according to rate of penalty. The adjustments were then multiplied by the rate that applied in calculating the imputed underpayment and added together to produce the portion of the imputed underpayment to which the penalty applies.

One comment observed that under proposed § 301.6233(a)-1(c)(2)(ii)(D) and (E) negative or decreasing adjustments were applied first to adjustments to which no penalties have been imposed and then to adjustments subject to the lowest penalty and suggested that this rule applies such adjustments in a manner that maximizes penalties. The comment recommended that the proposed regulations be revised to group adjustments by character for purposes of calculating the portion of the imputed underpayment subject to the penalty. This comment was partially adopted.

Section 6233(a)(3) provides that any penalty, addition to tax, or additional amount shall be determined at the partnership level as if such partnership had been an individual subject to tax under chapter 1 for the reviewed year and the imputed underpayment were an actual underpayment (or understatement) for such year. Section 6662, which imposes accuracy-related penalties on underpayments, applies to the portion of an underpayment attributable to certain circumstances such as negligence or disregard of rules or regulations or a substantial understatement of income tax. To determine the portion of an imputed underpayment to which a penalty applied, proposed § 301.6233(a)-1(c) applied rules similar to the ordering rules under § 1.6664-3 by disregarding the grouping and subgrouping rules under § 301.6225-1 and by applying decreasing adjustments to offset any positive adjustments to which no penalty was imposed, followed by adjustments to which 20 a percent penalty was imposed, and so forth. While the rules under proposed § 301.6233(a)-1(c) were consistent with the rules § 1.6664-3, this consistency did not allow for important distinctions between the calculation of an underpayment and the calculation of the imputed underpayment. For example, in computing an imputed underpayment, negative adjustments are generally not taken into consideration in determining the imputed underpayment unless the negative adjustment is in a grouping or subgrouping under § 301.6225-1 that results in a net positive adjustments because only net positive adjustments are totaled to determine the total netted partnership adjustment, which forms the base for an imputed underpayment prior to application of any adjustments to credits.

Section 301.6233(a)-1(c) has been revised to account for these distinctions and to apply the ordering rules under § 1.6664-3 within each grouping or subgrouping determined in accordance with § 301.6225-1. Because the revised rule uses the groupings and subgroupings determined under section 6225, in general the character of the adjustments within each grouping will be the same, as suggested by the comment. See § 301.6225-1(d). The revised rule maintains the treatment of an imputed underpayment as if it were an actual underpayment or understatement, but also respects the framework for calculating the imputed underpayment established under section 6225 and the regulations thereunder. The revised rule is also more streamlined, removes references to specific penalty rates to allow for any future statutory changes, and eliminates unnecessary steps and terminology. For example, the revised rule eliminates the term decreasing adjustment and instead uses the term “negative adjustment” as defined in § 301.6225-1(d)(2).

Section 301.6233(a)-1(c)(2) provides the rules for calculating penalties under section 6662, 6662A or 6663. Section 301.6233(a)-1(c)(2)(iii) provides the rules for applying negative adjustments. As a threshold matter, the rule provides that adjustments that do not result in an imputed underpayment and adjustments that are disregarded in determining the imputed underpayment are not taken into account when determining the amount of penalties. The rule generally provides that if any grouping or subgrouping as determined under § 301.6225-1 or § 301.6225-2 contains a negative adjustment and at least one positive adjustment subject to penalty, the negative adjustment is first used to offset any positive adjustment to which no penalties have been imposed within that grouping or subgrouping. If any amount of negative adjustments remains after offsetting positive adjustments to which no penalties have been imposed, the remaining amount of negative adjustment is applied within the grouping or subgrouping against positive adjustments to which a penalty has been imposed at the lowest rate. If after this step, any amount of negative adjustment remains, the process is repeated iteratively with respect to higher rates in ascending order of rate. Additionally, the regulations provide special rules for the application of negative credits. All adjustments to credits and adjustments treated as adjustments to credits are treated as grouped in the credit grouping without regard to whether the adjustments were subgrouped for purposes of § 301.6225-1 (or § 301.6225-2 in the case of modification). If negative credit adjustments remain after the application of negative adjustments in accordance with § 301.6233(a)-1(c)(2)(iii)(A), negative credit amounts are first applied to reduce the portion of the imputed understatement not subject to penalty then to reduce the portion of the imputed understatement subject to penalty iteratively in ascending order of rate.

Section 301.6233(a)-1(c)(2)(ii) provides the mechanical steps for calculating any penalty after any negative adjustments have been applied in accordance with 301.6233(a)-1(c)(2)(iii). The steps are applied separately for each particular penalty imposed with respect to the adjustments.

First, all adjustments that are not adjustments to credits or treated as adjustments to credits that are subject to a particular penalty and to which the highest rate of tax in effect for the reviewed year under section 1 or 11 was applied are totaled. Second, the total from step one is multiplied by the highest rate of tax in effect for the reviewed year under section 1 or 11. Third, the first and second steps are repeated for any other tax rates used to calculate the imputed underpayment, for example, rates applied as part of the modification process. Fourth, all of the results from completing the first three steps are totaled. Fifth, all adjustments in the credit grouping are netted. The total from step four is increased by any remaining positive adjustments to credits or decreased by negative adjustments to credits in accordance with the rules in § 301.6233(a)-1(c)(2)(iii). This result is the portion of the imputed underpayment subject to penalty. Sixth, the total from step five is multiplied by the penalty rate for the penalty to provide the total penalty amount.

C. Interest on Penalties, Additions to Tax, and Additional Amounts

As discussed earlier in section 4.C.ii.III. of this preamble, one comment recommended that the regulations adopt a bifurcated approach under which interest would run on tax from the due date of the return without regard to extensions while interest on penalties would run from the due date of the return including any extensions. The comment recommended that proposed § 301.6233(a)-1(b) be revised to provide that the interest imposed on penalties and additions to tax (other than assessable penalties) on an imputed underpayment begins on the day after the due date of the partnership return (including any extensions). This comment was partially adopted.

Proposed § 301.6233(a)-1(b) provided rules regarding interest on an imputed underpayment, but did not provide rules regarding interest on penalties, additions to tax, or additional amounts with respect to the imputed underpayment. In light of the comment, the final regulations under § 301.6233(a)-1(b) clarify that interest with respect to penalties, additions to tax, or additional amounts with respect to an imputed underpayment determined under the rules of § 301.6233(a)-1(c) is the interest that would be imposed under chapter 67 of the Code treating the partnership return for the reviewed year as the return of tax to with respect to which such penalty is imposed. To the extent the comment was suggesting a rule that is not consistent with chapter 67 of the Code, the comment was not adopted.

9. Judicial Review of Partnership Adjustments

Section 6234(a) provides that a partnership may file a petition in the Tax Court, a United States district court, or the Court of Federal Claims, within 90 days of the date on which an FPA is mailed under section 6231. A petition under section 6234 may be filed in a district court or the Court of Federal Claims only if the partnership filing the petition makes a jurisdictional deposit in accordance with section 6234(b). The jurisdictional deposit is the amount of (as of the date of the filing of the petition) any imputed underpayment (as shown on the FPA) and any penalties, additions to tax, and additional amounts with respect to such imputed underpayment. See proposed § 301.6234-1(b).

Under proposed § 301.6226-1(e), a partnership that has made an election under § 301.6226-1 is not precluded from filing a petition under section 6234(a). One comment stated that the proposed regulations provided no explanation as to how or whether the deposit amount under section 6234(b) may or should be adjusted to reflect a push out election under section 6226. The comment recommended the regulations should provide a mechanism that would enable a partnership to file a petition in a district court or Court of Federal Claims and still make an election under section 6226, without creating the risk of having tax on the partnership adjustments paid twice. The comment suggested that one possible approach might be to reduce the deposit amount by the amount that would be reported by partners that receive statements based on an election under section 6226. The comment suggested that another approach might be to provide a clear mechanism for having the partnership obtain a refund of the imputed tax deposit before any amounts are paid by the push out partners under section 6226.

The comment's suggestion regarding whether a partnership can make an election under section 6226 and also file a petition under section 6234 is addressed in section 4.A.v of this preamble. With respect to the comment's suggestion that the partnership deposit be reduced by the amount of the imputed underpayment that would be reported by partners that receive 6226 statements, this suggestion was not adopted. The plain language of section 6234(b)(1) makes clear that a petition for readjustment may be filed in district court or the Court of Federal Claims only if the partnership makes a jurisdictional deposit. The statute does not provide authority to alter this jurisdictional requirement by regulation for any partnerships, including partnerships that make the election under section 6226. The election under section 6226 is made with respect to an imputed underpayment, and therefore the deposit required under section 6234(b)(1) must equal the entire imputed underpayment to which the election relates (in addition to penalties and interest). An election under section 6226 is not with respect to a portion of an imputed underpayment; likewise, a deposit under section 6234(b)(1) cannot be for a portion of the imputed underpayment.

Moreover, a rule allowing for a reduction in the deposit amount for those partners that are furnished statements under section 6226 would not work as a practical matter. First, to the extent the comment was suggesting a rule that allows a reduction of the deposit equal to each partner's share of the adjustments, this rule would reduce the deposit amount to zero, provided all partners properly were furnished statements. This would effectively eliminate the deposit requirement for partnerships making an election under section 6226. There is nothing in the statute that allows any partnership, including a partnership making the election under section 6226, to be exempt from the jurisdictional requirements of section 6234(b).

Second, to the extent the comment was suggesting a rule that would reduce the deposit by the tax paid by partners furnished statements, this rule would also not work given the timing of when statements must be furnished. Pursuant to § 301.6226-2(b)(1), all statements must be furnished no later than 60 days after the date all of the partnership adjustments to which the statement relates are finally determined. Partnership adjustments are finally determined upon the later of the expiration of the time to file a petition under section 6234, or if a petition under section 6234 is filed, the date when the court's decision becomes final. The deposit under section 6234(b)(1) must be made when a petition is filed. The deposit cannot be reduced at the time by the amount the tax partners will pay because statements are not furnished until later in the process and even then the tax is not known until the partner files its return for the reporting year, which depending on timing of the FPA could be more than a year after the deadline for petitioning a court under section 6234(a). For these reasons, the comment's suggestion regarding a reduction in the amount of the deposit were not adopted, and the regulations were not changed in response to those suggestions.

With respect to the comment's recommendation that there be a clear mechanism for having the partnership obtain a refund of the tax deposit, the comment's concern that the deposit made in conjunction with a section 6226 election would result in double taxation is misplaced; however, the regulations were revised to clarify operation of the deposit rules. Under § 301.6234-1(c), the amount deposited under section 6234(b)(1) is not treated as a payment of tax (except with respect to chapter 67 of the Code). If the partnership makes a valid election under section 6226, no amount may be assessed against the partnership, and instead the partners must take the adjustments into account. To conform these two sets of rules, the final regulations under § 301.6234-1(e) clarify that a partnership is entitled to a return of any deposit that is in an amount in excess of the amount assessed against the partnership. To obtain a return of this excess deposit, the partnership must notify the IRS in writing in accordance with forms, instructions, and other guidance prescribed by the IRS.

10. Definitions and Special Rules

Five comments were received regarding the definition of pass-through partner under proposed § 301.6241-1, the rules regarding cease to exist determinations in accordance with proposed § 301.6241-3, and the rules regarding the nondeductibility of payments made under the centralized partnership audit regime as provided in proposed § 301.6241-4.

A. Definitions

Proposed § 301.6241-1 defined certain terms for purposes of the centralized partnership audit regime. Proposed § 301.6241(a)(5) defined a “pass-through partner” as “a pass-through entity that holds an interest in a partnership” and a “pass-through entity” to include a partnership described in § 301.7701-2(c)(1), among other types of entities. A partnership as described in § 301.7701-2(c)(1) means a business entity that is not a corporation under § 301.7701-2(b) and that has at least two members.

Section 6241(1) defines the term partnership to mean any partnership required to file a return under section 6031(a), which applies to every partnership as defined in section 761(a). Certain unincorporated organizations may elect under section 761(a) to not be subject to subchapter K. Proposed § 301.6241-5(a) provided that an entity that files a partnership return for any taxable year is subject to the centralized partnership audit regime with respect to such taxable year even if it is determined that the person filing the partnership return was not a partnership for such taxable year. Proposed § 301.6241-5(c)(2) provided an exception from this rule for entities for which a partnership return was filed for the sole purpose of making the election described in section 761(a).

One comment suggested there was an inconsistency between the definition of “pass-through partner” under proposed § 301.6241-1(a)(5), which defines partnership by reference to § 301.7701-2(c)(1), and the exception under proposed § 301.6241-5(c)(2) for entities that have elected out of subchapter K. The comment observed that the definition of partnership under § 301.7701-2(c)(1) arguably includes business organizations that have elected out of subchapter K under section 761(a). As a result, the term “pass-through partner” would include entities that may not be partnerships within the meaning of section 6031(a) because those entities are required to file partnership returns. To remedy this inconsistency, the comment recommended that the definition of “pass-through partner” in proposed § 301.6241-1(a)(5) be revised to eliminate the reference to § 301.7701-2(c)(1) and instead refer to the definition of “partnership” under section 6241(1), that is, “a partnership required to file a return under section 6031(a).”

The Treasury Department and the IRS agree with the comment that there was an inconsistency in the definition of “pass-through partner.” The approach recommended in the comment was adopted and remedied this inconsistency. The revision clarifies that business organizations that have elected out of subchapter K are not “pass-through partners.” This change is consistent with the definition of “partnership” under section 6241(1). Accordingly, the definition of “pass-through partner” under § 301.6241-1(a)(5) refers to a partnership that is required to file a return under section 6031(a), consistent with the definition of partnership under section 6241(1).

One comment was received regarding the application of the centralized partnership audit regime to pass-through partners as a result of the proposed regulations. Proposed § 301.6226-3 provided that a pass-through partner that is furnished a statement described in § 301.6226-2 must comply with proposed § 301.6226-3(e). The term “pass-through partner” includes partnerships that made an election under section 6221(b) for the taxable year. One comment suggested that there may be uncertainty with respect to how a partnership that has elected out of the centralized partnership audit regime complies with the requirements of the regime. For example, the elected out partnership may not have designated a partnership representative prior to receiving a statement described in § 301.6226-2. The comment recommended that the Treasury Department and the IRS should issue further guidance on elected out partnerships, including providing guidance that confirms an elected out partnership receiving a statement described in § 301.6226-2 and complying with § 301.6226-3(e) will not be deemed subject to the centralized partnership audit regime for other purposes.

A partnership that has made an election under section 6221(b) is not subject to the requirements of the centralized partnership audit regime as a partnership. For example, the partnership is not required to select a partnership representative. A partnership that has made an election under section 6221(b) may still be subject to the requirements of the centralized partnership audit regime in its capacity as a partner in a partnership that is subject to the centralized partnership audit regime. For example, sections 6222, 6223, 6226(b)(4)(C), 6241(7), and the regulations thereunder apply to all partners in a partnership subject to the centralized partnership audit regime, including any pass-through partner. Pass-through partners that must comply with these provisions include partnerships subject to the centralized partnership audit regime as partnerships as well as those that made an election under 6221(b) and other entities such as S corporations and trusts.

For example, under § 301.6226-3(e) a pass-through partner that receives a push out statement from an audited partnership must furnish statements to its owners or, if it fails to furnish statements to its owners, pay an imputed underpayment. This rule applies regardless of whether or not the pass-through partner is subject to the centralized partnership audit regime in its capacity as a partnership. Nothing in proposed § 301.6226-3(e) indicated that a pass-through partner not otherwise subject to the centralized partnership audit regime becomes subject to other provisions of the regime simply because it must comply with § 301.6226-3(e) in its capacity as a partner. Therefore, the Treasury Department and the IRS have declined to provide further guidance regarding the application of the centralized partnership audit regime to partnerships that have made an election out of the centralized partnership audit regime under section 6221(b).

B. Treatment Where a Partnership Ceases To Exist

Several comments were received regarding the treatment of partnership adjustments where a partnership ceases to exist under section 6241(7). The comments pertained to two general areas: (1) The determination that a partnership has ceased to exist; and (2) the definition of “former partners” under proposed § 301.6241-3(d).

i. Determination That Partnership Has Ceased To Exist

Proposed § 301.6241-3 provided that, if the IRS determined a partnership ceased to exist (as described in proposed § 301.6241-3(b)(2)) before the partnership adjustments take effect (as described in proposed § 301.6241-3(c)), the partnership adjustments are taken into account by the former partners (as described in proposed § 301.6241-3(d)) in accordance with proposed § 301.6241-3(e). Proposed § 301.6241-3(b)(1) provided that a determination that a partnership had ceased to exist was within the sole discretion of the IRS, and the IRS was not required to determine that a partnership has ceased to exist, even if the partnership meets the definition of cease to exist in proposed § 301.6241-3(b)(2).

One comment stated that the language in proposed § 301.6241-3(b)(1) and (2) was ambiguous and allowed for excessive latitude and a potential for abuse of discretion in making such a cease-to-exist determination. The comment suggested that the IRS, upon formal request, should be compelled to consider the facts and circumstances of a cease-to-exist determination.

If the IRS receives a letter requesting that the IRS determine that a specific partnership has ceased to exist and providing detailed facts to support such a determination, the IRS will consider the circumstances in the letter and whether it is in the interest of sound tax administration to determine that the partnership has ceased to exist. The IRS, however, will retain its discretion as to whether to determine that a partnership has ceased to exist, even if the facts would indicate that the partnership meets the criteria in § 301.6241-3(b)(1)(i) and (ii). The cease-to-exist rules are inherently related to collection issues with respect to amounts not paid as a result of an administrative proceeding under the centralized partnership audit regime. Where a taxpayer or partnership properly owes amounts to the U.S. government, the IRS should be provided broad latitude, within the statutory limits, to ensure that such amounts are ultimately collected. To that end, it is administratively necessary for the IRS to retain its discretion to make a determination about whether a partnership ceases to exist. Cease to exist is not the only collection tool available to the IRS. The Treasury Department and the IRS therefore decline to create an additional unnecessary administrative rule that would compel the IRS to make a determination if requested by a taxpayer. Accordingly, no changes were made to the final regulations as a result of this comment.

Although the regulations do not require the IRS to make a cease-to-exist determination upon a formal request, the regulations have been revised to provide that a partnership does not cease to exist for purposes of section 6241(7) without the IRS determining the partnership has ceased to exist. Under proposed § 301.6241-3(b), cease to exist was defined as a situation where the partnership terminates under section 708(b)(1) or is unable to pay, in full, any amount due under subchapter C of chapter 63. It was not clear from the proposed regulations whether a partnership meeting those criteria could cease to exist without an accompanying determination to that effect by the IRS. The final regulations under § 301.6241-3(b) make clear that a partnership ceases to exist if the partnership terminates within the meaning of section 708(b)(1) or the partnership does not have the ability to pay, in full, any amount due under subchapter C of chapter 63, but only if the IRS makes a determination that the partnership has ceased to exist under one of those two situations. The final regulations provide certainty to both taxpayers and the IRS about when a partnership ceases to exist and make the cease-to-exist rules more administrable for the IRS by eliminating any confusion about whether a partnership has ceased to exist.

Proposed § 301.6241-3(b)(1) provided that if the IRS determines that a partnership ceased to exist, the IRS will notify the partnership and its former partners within 30 days of such determination. The final regulations clarify that a failure by the IRS to send a notification required under § 301.6241-3(b)(1) to the former partners of the partnership does not invalidate a determination that the partnership has ceased to exist. In addition, one comment suggested that the IRS should also notify the partnership representative (and designated individual, if applicable). To the extent the comment is referring to the partnership representative of the audited partnership, the comment has been adopted. In the case of a determination that the partnership has ceased to exist, the IRS will notify the partnership, the former partners of the partnership, and when an audited partnership has ceased to exit, the partnership representative (and designated individual, if applicable) for the reviewed year. This rule is consistent with the other notification provisions throughout the centralized partnership audit regime, which provide notification to the partnership representative and designated individual, if applicable. To the extent the comment was referring to a partnership that received a push out statement, the comment was not adopted. The partnership representative from the reviewed year or any other year of a partnership that received a push out statement has no connection to the unpaid, current liability and notification would not be appropriate or necessarily beneficial to the partnership. In addition, there would be administrative complexity for the IRS in determining the appropriate partnership representative for a partnership partner to notify because the IRS will only have been in contact with the partnership representative of the audited partnership, not partnership representatives of other partnerships not subject to an administrative proceeding.

The same comment also suggested that the partnership should be allowed to appeal a determination that the partnership has ceased to exist to the IRS Office of Appeals within 60 days of the receipt of the IRS's determination that the partnership has ceased to exist. This comment was not adopted. As discussed in section 11 of this Summary of Comments and Explanation of Revisions, any guidance regarding the availability of review by the IRS Office of Appeals will be provided outside of these regulations to preserve flexibility and allow the IRS to revise its procedures as it gains experience with the centralized partnership audit regime.

Former proposed § 301.6241-3(b)(2)(iii) had provided that the IRS could not determine that a partnership ceased to exist with respect to a partnership adjustment after the expiration of the period of limitations on collection applicable to the amount due resulting from such adjustment. One comment observed that the reference to the “period of limitations on collection applicable to the amount due” did not specify whether the period of limitations related to the partnership or the partner. In the August 2018 NPRM, former proposed § 301.6241-3(b)(2)(iii) was revised to provide that the relevant period of limitations is the period of limitations on collection applicable to the assessment made against the partnership for the amount due resulting from such adjustment. Because the plain language of proposed § 301.6241-3(b)(2)(iii) resolves the ambiguity identified by the comment, no further changes were made in the final regulations in response to this comment.

ii. Definition of Former Partners

Proposed § 301.6241-3(d) defined the term “former partners” as the adjustment year partners of the partnership that ceased to exist, unless there are no adjustment year partners in which case the former partners are the partners of the partnership during the last taxable year for which a partnership return under section 6031 was filed with respect to such partnership. If the IRS determined that the partnership ceased to exist prior to the partnership adjustments taking effect, the former partners of the partnership take into account the partnership adjustments as if the partnership had made an election under section 6226 to push out the adjustments to the former partners. See proposed § 301.6241-3(e).

One comment expressed concern that, once a partnership was placed under examination, the partners could transfer their partnership interests to defunct corporations or otherwise uncollectible entities such that the IRS would be unable to collect from the “former partners” under the provisions of proposed § 301.6241-3. Similarly, the comment expressed concern that if the partnership was able to pay some but not all of the amounts due under the centralized partnership audit regime and the IRS did not determine that the partnership had ceased to exist, the partners would benefit from the improper treatment of the items and the partnership will not have paid the amounts owed as a result of the adjustments. The comment suggested that the final regulations add the ability for the IRS to assess the transferees of the former partners and the owners of the partnership.

Under section 6232(f), as added by the TTCA after the comment was received, if the partnership does not pay any amount of the imputed underpayment or specified similar amount (as defined in section 6232(f)(2)) within 10 days after the date on which the IRS provides notice and demand for such payment, the IRS may assess upon each partner of the partnership (as of the close of the adjustment year) or, if the partnership has ceased to exist, the former partners of the partnership, a tax equal to such partner's proportionate share of such amount (including any penalties and interest). Section 6232(f) provides the IRS with the ability to directly make assessments against the partners of a partnership that fails to pay an imputed underpayment or specified similar amount much like the assessment authority suggested by the comment. In addition, nothing in proposed § 301.6241-3 limits or otherwise modifies the IRS's existing tools under the Code, related case law, or any other law with respect to transferee liability. Accordingly, no changes were made to the final regulations in response to this comment. For these reasons, the clarification recommended by the comment was not adopted.

Another comment suggested that the definition of “former partners” under proposed § 301.6241-3(d) should include the reviewed year partners of the partnership that has ceased to exist in situations where the partnership has made an election under section 6226. Proposed § 301.6241-3(b)(2)(i)(A) provided that the IRS may not determine that a partnership has ceased to exist solely because the partnership has a valid election under section 6226 in effect with respect to any imputed underpayment. If the partnership makes a valid election under section 6226, the partnership is not liable for the imputed underpayment to which the election relates. See section 6226(a) and § 301.6226-1(b)(2). As a result, the IRS cannot determine the partnership ceases to exist with respect to that imputed underpayment (see § 301.6241-3(b)(2)), and the cease to exist provisions under proposed § 301.6241-3 will not apply to such partnership with respect to that imputed underpayment. Therefore, this comment was not adopted.

Although this comment was not adopted, a clarification was made to the definition of “former partners” under proposed § 301.6241-3(d)(1)(i). As stated earlier in this section of the preamble, the term “former partners” was defined under proposed § 301.6241-3(d)(1)(i) as the partners for the adjustment year that corresponds to the partnership taxable year to which the partnership adjustment relates. The final regulations under § 301.6241-3(d)(1)(i) clarify that the term “former partners” means, for a partnership that has ceased to exist, the partners of the partnership during the adjustment year (as defined in § 301.6241-1(a)(2)) that corresponds to the reviewed year for which the adjustments were made.

C. Payments Nondeductible

Proposed § 301.6241-4 provided that no deduction is allowed under subtitle A of the Code for any payment required to be made by a partnership under the centralized partnership audit regime, which includes any imputed underpayment or any interest, penalties, additions to tax, or additional amounts with respect to an imputed underpayment. Former proposed § 301.6225-1(a) provided that a partnership's expenditure for the imputed underpayment “and the adjustments that result in the imputed underpayment” are taken into account by the partnership in accordance with § 301.6241-4.” One comment suggested that, because of the cross reference to § 301.6241-4 in former proposed § 301.6225-1(a), that the regulations under § 301.6241-4 be revised to address the treatment of the adjustments that result in the imputed underpayment. This comment was not adopted.

Proposed § 301.6241-4 addressed the deductibility of payments required under the centralized partnership audit regime and did not address the treatment of adjustments that were taken into account in determining the amount of such payments. In the August 2018 NPRM, former proposed § 301.6225-1(a) was revised to remove the erroneous cross-reference to the adjustments being taken into account under § 301.6241-4. To the extent the comment was recommending that revision, the comment was addressed by the revisions in the August 2018 NPRM. To the extent the comment was recommending guidance on the treatment of partnership adjustments in the context of adjusting tax attributes, those rules were provided in proposed §§ 301.6225-4 and 301.6226-4.

D. Extension to Entities Filing Partnership Returns

Proposed § 301.6241-5(c)(2) provided that the centralized partnership audit regime would not apply to a taxable year for which a partnership return was filed for the sole purpose of making an election described in section 761(a) (regarding election out of subchapter K for certain unincorporated organizations). The final regulations under § 301.6241-5(c)(2) retain this rule but clarify that the centralized partnership audit regime will not apply to a taxable year in which a valid section 761(a) election is made. This change was made to clarify that the election under section 761(a) must be valid in order for the rules under § 301.6241-5 not to apply to a partnership return that is filed with respect to a taxable year.

11. Comments Concerning IRS Appeals Office

Several comments were received regarding the interaction between the centralized partnership audit regime and the IRS Appeals. For example, certain comments suggested the regulations clarify the rules regarding a partnership's ability to raise various issues and determinations with IRS Appeals, including the timing of any involvement by IRS Appeals.

Procedures governing IRS Appeals are beyond the scope of these regulations. Accordingly, except as described in sections 3.B.i., 3.B.vii., 4.B.v., and 10.B.i. of this preamble, neither this preamble nor the regulations address IRS Appeals procedures in the context of the centralized partnership audit regime. These procedures are expected to be addressed in future guidance.

12. Effect of Provisions Enacted Under the Tax Cuts and Jobs Act

One comment suggested that the final regulations include guidance on the effect of the new partnership-related provisions of the Tax Cuts and Jobs Act, formally known as “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” Public Law 115-97 (TCJA), including examples of how adjustments to partnership-related items and tax attributes specific to the new TCJA provisions are treated under sections 6225 and 6226 by partnerships and their partners.

The Treasury Department and the IRS have determined not to provide guidance on how the provisions of the TCJA, including any partnership-related provisions, interact with the centralized partnership audit regime. The TCJA provisions are substantive tax rules that work independently of the procedural rules of the centralized partnership audit regime. Therefore, no change would necessarily be required as a result of these substantive provisions. However, as the Treasury Department and the IRS continue to gain experience with the centralized partnership audit regime and implement rules under the new TCJA provisions, guidance will be issued if it is later determined that doing so would be appropriate. For these reasons, this comment was not adopted.

13. Effective Date of Centralized Partnership Audit Regime

Several comments recommended that the effective date of the centralized partnership audit regime be delayed. These comments were not adopted because the effective date for the statutory provisions governing the centralized partnership audit regime is established by statute. See BBA section 1101(g).

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. Therefore, a regulatory impact assessment is not required.

Because the final regulations would not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for 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 www.irs.gov.

Drafting Information

The principal authors of these final regulations are Jennifer M. Black of the Office of the Associate Chief Counsel (Procedure and Administration), Steven L. Karon of the Office of the Associate Chief Counsel (Procedure and Administration), and Joy E. Gerdy Zogby of the Office of the Associate Chief Counsel (Procedure and Administration). However, other personnel from the Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 301

• Employment taxes
• Estate taxes
• Excise taxes
• Gift taxes
• Income taxes
• Penalties
• Reporting and recordkeeping requirements

Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 is amended by adding entries for §§ 301.6221(a)-1, 301.6222-1, 301.6225-1, 301.6225-2, 301.6225-3, 301.6226-1, 301.6226-2, 301.6226-3, 301.6227-1, 301.6227-2, 301.6227-3, 301.6231-1, 301.6232-1, 301.6233(a)-1, 301.6233(b)-1, 301.6234-1, 301.6235-1, 301.6241-1, 301.6241-2, 301.6241-3, 301.6241-4, 301.6241-5, and 301.6241-6 in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 301.6221(a)-1 also issued under 26 U.S.C. 6221.

Section 301.6222-1 also issued under 26 U.S.C. 6222 and 6223.

Section 301.6225-1 also issued under 26 U.S.C. 6225.

Section 301.6225-2 also issued under 26 U.S.C. 6223 and 6225.

Section 301.6225-3 also issued under 26 U.S.C. 6225.

Section 301.6226-1 also issued under 26 U.S.C. 6223 and 6226.

Section 301.6226-2 also issued under 26 U.S.C. 6226.

Section 301.6226-3 also issued under 26 U.S.C. 6226.

Section 301.6227-1 also issued under 26 U.S.C. 6223 and 6227.

Section 301.6227-2 also issued under 26 U.S.C. 6227.

Section 301.6227-3 also issued under 26 U.S.C. 6227.

Section 301.6231-1 also issued under 26 U.S.C. 6231.

Section 301.6232-1 also issued under 26 U.S.C. 6232.

Section 301.6233(a)-1 also issued under 26 U.S.C. 6233.

Section 301.6233(b)-1 also issued under 26 U.S.C. 6233.

Section 301.6234-1 also issued under 26 U.S.C. 6234.

Section 301.6235-1 also issued under 26 U.S.C. 6235.

Section 301.6241-1 also issued under 26 U.S.C. 6241.

Section 301.6241-2 also issued under 26 U.S.C. 6241.

Section 301.6241-3 also issued under 26 U.S.C. 6241.

Section 301.6241-4 also issued under 26 U.S.C. 6241.

Section 301.6241-5 also issued under 26 U.S.C. 6241.

Section 301.6241-6 also issued under 26 U.S.C. 6241.

Par. 2. Section 301.6221(a)-1 is added to read as follows:

Par. 3. Section 301.6222-1 is added to read as follows:

Par. 4. Section 301.6225-1 is added to read as follows:

Par. 5. Section 301.6225-2 is added to read as follows:

Par. 6. Section 301.6225-3 is added to read as follows:

Par. 7. Section 301.6226-1 is added to read as follows:

Par. 8. Section 301.6226-2 is added to read as follows:

Par. 9. Section 301.6226-3 is added to read as follows:

Par. 10. Section 301.6227-1 is added to read as follows:

Par. 11. Section 301.6227-2 is added to read as follows:

Par. 12. Section 301.6227-3 is added to read as follows:

Par. 13. Section 301.6231-1 is added to read as follows:

Par. 14. Section 301.6232-1 is added to read as follows:

Par. 15. Section 301.6233(a)-1 is added to read as follows:

Par. 16. Section 301.6233(b)-1 is added to read as follows:

Par. 17. Section 301.6234-1 is added to read as follows:

Par. 18. Section 301.6235-1 is added to read as follows:

Par. 19. Section 301.6241-1 is added to read as follows:

Par. 20. Section 301.6241-2 is added to read as follows:

Par. 21. Section 301.6241-3 is added to read as follows:

Par. 22. Section 301.6241-4 is added to read as follows:

Par. 23. Section 301.6241-5 is added to read as follows:

Par. 24. Section 301.6241-6 is added to read as follows: